How has British economy managed to turn around?

Last year the IMF chastised the British government for following an austerity policy and urged the government to change course. As far as I am aware, they did not. One credit rating agency, Fitch, downgraded the UK’s credit rating from AAA to AA+ citing a “weakened economic outlook”.

This week the IMF will upgrade the UK’s growth forecast to 2.4% for 2014, making it one of the fastest growing Western economies. The Bank of England and the Office for Budget Responsibility are also set to upgrade their growth forecasts, too. Unemployment has been steadily but slowly falling for the last six months. Inflation has just met the Bank of England’s 2% target for the first time since 2009. A slim majority of Britons (52% to 47%) now feel confident about the economy. All sectors of the economy, from services to construction to manufacturing are now firmly in growth mode, if you believe PMI reports.

As far as I can see, in terms of policy, not much has changed in how the coalition has been governing for the past few years. Europe, our largest export market, is still a basket case. Without wishing to overstate the economic outlook, compared to a few years ago when it seemed that the entire banking system may collapse, the economic outlook for Britain now looks decidedly more rosy. That said, what explains the turnaround in the outlook of the British economy?

I think it is just a case of holding their (our) nerve. Taking a sensible (if temporarily painful and imperfect) position and sticking to it. It was very helpful to have a clear change of leadership from Labour to Tory. Labour had sleepwalked into the mess so their judgement could be questioned. A new broom at least gave the hope for a new and better direction.

We were in a terrible situation and could have descended into utter chaos had we thrown political instability into the mix and all the economic to-ing and fro-ing that would have brought with it.

Probably the smartest thing the Torys did was to instigate the 5 year fixed term and enter into the coalition. It has proved rather fractious but the important thing is that it was immediately given the stamp of permanency and the economic trend was set for the foreseeable future.

This has allowed a stability and confidence in the UK that other (less financially screwed) euro countries didn’t and don’t have. The UK at least wants to portray itself as a safe pair of hands and in the financial world, confidence and perception counts for a lot.

Of course I’ve yet to see evidence in europe or the USA that the underlying problems are fixed and I wouldn’t be surprised to see further turmoil in the Eurozone.
Some countries are very relieved that they have found a comfortable ledge on the way down the cliff-face but they may have further to fall and certainly haven’t got a plan for climbing back up again.

I think economics is less a science and more of an art. It comes down to human behaviour rather than an impersonal flow of money and work-hours.

I don’t know if it has picked up as much as surpressed growth has finally emerged.

I very much enjoyed pointing this out to a previous boss. I would ask him whether his degree had an “a” for arts or an “Sc” for science…like what mine did!

Economics only seems to be a science in retrospect. i.e. people are happy to tell you why something happened but when it comes to accurately predicting the big stuff…eh…not so good. Which is why confidence is important. Gravity works whether you believe in it or not. A bank or a currency? not so much.

Not overtly. But a lot of the planned cuts that were meant to happen in this Parliament have been shifted quietly to post-2015. The original deficit target has been long since abandoned. (See slide 30 in particular of this pdf.)We are now, in fact, cutting less quickly than Labour originally proposed in 2010.

There’s been a lot of good news, but that last “if” is a big one. Actual manufacturing output data for last quarter isn’t reflective of those positive PMIs.

Europe is showing some growth (or at least, parts of it are) which has helped exports as has general global growth. But the main driver of growth has been consumer spending. (See link above.) As we’re still seeing declines in average real wages (1% nominal growth vs 2% inflation) this is being fuelled by increased borrowing - a turnaround after 5 years of falling unsecured debt. Consumer confidence is higher than it has been since the recession hit, and this seems to be reflected in a bet that real wages will start to grow quickly, permitting them to borrow now. Higher house prices - for those that own - are also driving confidence/spending.

However, real wages are not predicted to grow until the end of this year. Moreover, 2% inflation overall doesn’t reflect the impact that double digit increases in energy, fuel and food costs will have on people on mid-to-low incomes. Businesses are not investing in any significant way (in fact, while labour remains cheap, the need to invest is minimised). Exports have a long way to go to be reliable. So the recovery could still easily falter.

They hid the bodies better and made the poor pay more for the rich (and made it clear no bankers were going to suffer)… The view from down here at the bottom of the sack looks grim and getting worse every week.

Paul Krugman notes that there is less austerity in the UK these days but remains unimpressed with Great Britain’s growth. Check out the handy chart showing how much worse the economy is doing this time around compared to other recessions including the Great Depression.

yes its more to do with ideology that the economy…

Unempolyment is falling but what I can’t quite grasp is the scale of the ‘rebalancing’ of jobs within the economy from public to private sector.

It seems the market is just eating up all those hundreds of thousands who lost their jobs and way more as well …

It would be nice if an economy were to recover to pre-recession levels before people start proclaiming that the economy has turned around.

Yeah. What recovery? I see people talking about it, but I don’t actually see it.

Well, the latest unemployment figures do show a sharp drop, down to 7.1% - so there are 167K more people in jobs (net!). That’s a good thing. Whether those jobs pay enough and offer enough security so that people feel financially stable is a different question. The generally increased rates of consumer borrowing over the last 6 months would suggest that people do.

But it will be a while before increased employment translates into higher wages because a) there’s still a large pool of un- and under-employed and b) productivity is still low despite the pick up in employment which suggests that the jobs people are getting are less productive - and worth lower wages - than the jobs people used to have.

This, from the Ernst and Young Item Club is really interesting - they see the growth being driven almost entirely by consumer spending and explicitly make the point that this won’t do. Without actual business investment and/or making a net profit on exports vs imports, the recovery is not sustainable. People are spending on credit - basically moving money from the future to the present. So at some point in the future, the money won’t be there. Unless there’s broad-based growth across the economy.

They should wait until then to say the economy has recovered, but “turned around” doesn’t imply that things are fixed so much as they are no longer getting worse.

Can we define “recovered” or “turned around”? What is the evidence?

For instance, the 2013 Q3 GDP rate for the UK was 0.8%.

Over the last six quarters, the GDP was -0.5, 0.6, -0.3, 0.4, 0.7, and 0.8%.

0.8% isn’t even the best quarter GDP rate in the UK since the economic collapse.

What are we talking about?

But that’ll be after the May 2015 election. The goal is to get relected first, they’ll worry about the economy later. At this point in the election cycle, a property bubble is almost perfect.

I’d be skeptical of that unemployment rate. It’s no secret that the US unemployment rate underestimates the actual unemployment numbers, thanks to statistical gimmickry such as excluding “discouraged” workers from the figure.

That’s the difference between U3 and U4. Yes, U3 is typically reported, but that’s no secret. Government agencies (whether British or US) are usually pretty good about letting you know what they are actually measuring. But misconstruing of figures by the press or people with an agenda is a common practice.

Unemployment and other statistics for the UK are maintained by the Office for National Statistics, which is an independent and apolitical entity like the CBO. In other words, there’s no reason for them to massage the figures (which was common practice when the Department of Employment and the Treasury were in charge of such things.)

This is a good question, and it’s absolutely fair to say that any positive views of the British economy rely heavily on low expectations.

Q4 2013 GDP figures have been released - growth this quarter was 0.7%, meaning the UK economy grew 1.9% overall in 2013. As it was flat (0.3%) in 2012 this is a big improvement. However, GDP overall is still 1.3% below where the 2008 peak meaning that in 5 years we still haven’t recovered. We will probably close that gap over the next year.

In terms of “turned around” the figures you quote above do show a fairly solid shift from stagnant to growing - 2013 was the first year since 2008 that we’ve had growth every quarter.

In terms of recovery, we’re still not back at pre-crisis growth rates of between 2.5% and 3%. We’re predicted to get up to 2.4% this year (for what economic forecasts are worth) which will be nearer the mark.

Final health warning: GDP figures are always subject to revision of anything up to 3 or 4% in the months following the initial release so all the analysis you will read in the wake of this release (including the above) may well be misguided.