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Strong growth predicted for this year but UK economy is not yet out of danger

English.news.cn   2014-07-29 08:18:11

LONDON, July 28 (Xinhua) -- The British economy is at last larger than it was just before the financial crisis and subsequent recession, but the headline news covers some likely future good news about the economy and some problems which still persist.

First, the headline news; the British economy continues its strong growth streak, that began at the beginning of 2013, with 0.8 percent quarter-on-quarter growth in Q2 this year, which is 3.1 percent up on a year before and above the long-term trend of 2.5-2.8 percent annual growth.

This follows 0.8 percent growth in Q1, and it puts the economy at 0.2 percent larger than in Q1 2008. So, Britain has lost six years of growth.

The continued growth in the economy, evident since a surprise return to growth in 2013, is a cause for celebration, and is likely to continue.

The British economy is predicted to grow by 3.1 percent this year by the central bank, the Bank of England (BOE).

The International Monetary Fund (IMF) last week uprated its forecast for growth to 3.2 percent this year, the highest rate among G7 developed nations.

So much for the good news. Underlying the figures are several weaknesses.

DANGERS OF RATE HIKE, LOW WAGE SETTLEMENTS

First, interest rates are at 0.5 percent, an historical low reached in March 2009 at the height of the financial crisis when monetary policy was focused on preventing the economy going into meltdown.

With the Bank Rate at that low level for so long, many businesses and householders have become used to it. The current main problem for the BOE’s rate-setting Monetary Policy Committee (MPC) is when to start raising rates.

If the MPC moves too soon it is in danger of damaging the significant momentum built up in the recovery.

Second, a serious cause for concern is that the economic recovery is largely in the services sector, which is to be expected as services accounts for just over 75 percent of the economy.

But the services sector is the only one where output is above the pre-crisis level; in manufacturing, where much of Britain’s export muscle lies, output is 7.5 percent below pre-crisis levels and construction output is more than 10 percent below. And the construction sector contracted by 0.5 percent over Q2, further compounding the imbalances between sectors.

With two sectors still underperforming, the good news is further undermined with the weakness in the driver of economic recovery.

The UK recovery is consumption led, with households dipping into their savings to keep up their spending.

This is sustainable for only a while, and not a strategy for long-term growth unless wages keep up with inflation. And that is not happening. CPI inflation hit 1.9 percent in June, while wages, excluding bonuses, went up just 0.7 percent year-on-year in the three months February to April.

While this low wages growth figure contains some baseline distortion, with wages boosted in April 2013 by strategies to take advantage of a new tax regime, it does indicate a continued and serious weakness in the economy.

According to a June paper from the Resolution Foundation, an independent research organization, Britons are now earning about 14 percent less in real terms than they did before the financial crisis.

Third, sterling is currently strong, having risen 8 percent since the beginning of the year against the dollar. The IMF Monday said it believed sterling was overvalued by 5-10 percent, and this is having an effect on exporters who find it undermines their competitiveness.

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Editor: Mengjie
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