Sunday, April 13, 2014
Plenty of lessons for France in Britain's recovery
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

Being British means we are easily embarrassed even by modest success. The default position, when it comes to the economy, is to grumble. There is usually plenty to grumble about even in the good times, so that keeps us happy.

So how should we respond to the fact that the International Monetary Fund now predicts that Britain’s growth rate this year, which it thinks will be 2.9%, will be the fastest in the G7?

Should we celebrate, or worry that all too often in the past pride in our economic performance has come before a fall? Can it, in other words, last?

Actually we should celebrate a little. Olivier Blanchard, the IMF’s chief economist, went much too far a year ago, warning George Osborne that he was “playing with fire” with his policies and has been proved spectacularly wrong. Hence the chancellor’s upbeat “victory roll” speech to the American Enterprise Institute on Friday.

Blanchard was not alone - misreading Britain’s economy from the other side of the Atlantic (and sometimes from this side) proved to be an occupational hazard - but he was perhaps the most prominent.

There is also a delicious irony, against the French-run IMF, in that if you were looking for an economy with growth problems, look no further than France, predicted to grow by just 1% this year after 0.3% last year and zero in 2012.

Its new prime minister, Manuel Valls, has outlined a programme of spending cuts, tax reductions and labour market reforms that almost sound Thatcherite. Time will tell whether it will work.

What about Britain’s place in the economic sun? The IMF expects Britain to grow by 2.5% in 2015, second only to America. It expects inflation slightly below the 2% target and, to take up last week’s theme, a welcome narrowing of the current account deficit to just over 2% of gross domestic product next year.

That’s enough IMF. It was, after all, wrong in one direction a year ago, so could easily be wrong in the other direction now. Are there other reasons to be optimistic?

The answer to that is yes. Britain’s better growth performance reflects improved credit availability, reduced fears of new crises, rising business and consumer confidence and a strong labour market.

One paricularly positive development is that industrial production, having hit a post-recession low in 2012, is now on a firm upward trend, with manufacturing output up nearly 4% on a year ago.

Industry is being supported by stronger retail and consumer spending, rather than exports. Exports of goods and services in the latest three months were 1.7% down on a year earlier. There may, though, be some import substitution going on. The latest figures show that while exports have been disappointing, imports were even weaker.

Indeed, import substitution may be our best hope when it comes to the growth contribution from trade. Delta Economics, which specializes in analysing and forecasting trade, predicts that this year will be lacklustre, with just 1% world merchandise trade growth. Export success will be hard-won in this environment.

Much more positive, as the Ernst & Young Item Club points out in its new forecast, a distinct shift is happening in the labour market. So far it has been a case of strong employment growth balanced by weak wages.

The new Item forecast has both rising together, with employment threatening to meet Osborne’s full employment target, which he defined as the highest employment rate in the G7. Canny politicians know that you should never set yourself a target unless you believe you have a good chance of meeting.

Professor Peter Spencer, who runs the Item forecast, says Britain will challenge Germany for the highest employment rate in the G7. Alongside that, a combination of stronger wages growth and weak commodity prices should mean sustained growth in real wages, from now.

Item, like the Office for Budget Responsibility, sees plenty of a kick from business investment, with more than 9% growth this year followed by only slightly slower rates of expansion later.

2014 could turn out to the sweet spot of this recovery - though some economists think next year will be just as strong - but even the gloomy do not think there will be a return to the relapses the economy was prone to in the period from 2010 to 2012. The debate is over the strength of recovery, not whether it will last, and that has to be an improvement.

Could it be a case of pride coming before a fall? One worry, almost an ever-present in Britain, is housing. Prices, according to the latest LSL-Acadata index, are up by 7.2% in the past 12 months, with London up 13.3%. Other measures are even stronger.

A few days ago I took part in the HSBC great housing debate, organised by the Wriglesworth Consultancy. Though house prices are indeed buoyant, many at the debate saw reasons why they will cool, including the mortgage market review, which sets tougher tests for loan applicants, and which takes effect in less than a fortnight.

It is also the case that the contribution of the Help to Buy scheme to the housing market is greatly exaggerated. Fewer than 17,000 Help to Buy mortgages have been advanced since the first phase of the scheme was launched a year ago, and only just over 1,000 in London. The Help to Buy total, so far, is running at under 4% of all new mortgages.

Is everything perfect? No, there is still plenty to grumble about, and that will keep us happy. The recovery is better than it was but not as good as it could be. We may not even be top of the G7 growth league for too long. But things are a lot better than they looked a year ago. And that can’t be bad.