Thursday 23 October 2014

Britain's economy bounces back to pre-recession peak

John-Paul Ford Rojas

Published 25/07/2014 | 12:29

Britain's Chancellor of the Exchequer George Osborne leaves 10 Downing Street in central London
Britain's Chancellor of the Exchequer George Osborne leaves 10 Downing Street in central London

Britain has finally emerged from its worst post-war downturn after growth of 0.8% in the second quarter of 2014 took the size of the economy above its pre-recession peak.

The performance left the UK's gross domestic product (GDP) 0.2% ahead of its level at the start of 2008, the Office for National Statistics (ONS) said.

It marks the end of a period when GDP slumped to 7.2% below its pre-recession levels by the middle of 2009.

The stuttering recovery did not take flight until last year when growth began to accelerate.

But Britain is now predicted to be the fastest growing major world economy in 2014. Yesterday the International Monetary Fund (IMF) raised its GDP forecast for the fourth time in a row to 3.2%.

Commenting on the figures, Chancellor George Osborne said: "Thanks to the hard work of the British people, today we reach a major milestone in our long-term economic plan."

Today's figures showed that GDP was 3.1% higher in the second quarter compared with the same period a year ago - the highest such year-on-year increase since the last quarter of 2007.

The 0.8% growth for the second quarter, which was widely forecast, was primarily driven by the powerhouse services sector, which accounts for three-quarters of output, and grew by 1%.

But expansion in the manufacturing sector slowed to just 0.2% while construction shrank by 0.5%, dragged down by a weak May for builders.

For both sectors it was the worst quarter since the start of 2013.

The figures mean that while the services sector is now 2.9% ahead of its level at the start of 2008, manufacturing is still 7.4% behind and construction lagging by 10.7%.

The continuing pace of the recovery - with growth maintaining the pace of the first three months of the year - will feed into expectations about the timing of an interest rate rise.

Accelerating signs of economic improvement have seen these brought forward.

However, critics of the Coalition point to evidence that it is not yet filtering through to ordinary households as real terms pay is falling.

Latest figures show while employment levels are improving strongly, pay growth has fallen to just 0.3%, lagging well behind inflation at 1.9%.

Opponents of the Government also point to the measure of GDP per head, which in the first quarter of this year was 5.5% below the peak. The measure for the second quarter is not yet available.

Shadow chancellor Ed Balls said: "At long last our economy is back to the size it was before the global banking crisis - three years after the US reached the same point.

"But with GDP per head not set to recover for three more years and most people still seeing their living standards squeezed, this is no time for complacent claims that the economy is fixed.

Prime Minister David Cameron tweeted: "It's encouraging news that the economy is larger than pre-crash levels. Our long term economic plan is working and this is a major milestone."

Deputy Prime Minister Nick Clegg said: "Today is a big day for Britain - the rescue has worked: our economy is now larger than it was before the crash.

"For the Liberal Democrats, this shows we were right to step up to the plate and form a coalition Government in the first place.

"Our first duty was to pull the economy back from the brink. The rescue has succeeded because of us."

Ben Brettell, senior economist at stockbrokers Hargreaves Lansdown, said: "The UK economy isn't as strong as it looks.

"While it has surpassed its pre-crisis peak in absolute terms, a larger population means GDP per capita is around 6% lower.

"The economy has been growing by adding jobs, but there is an underlying issue with productivity, and this is why we are not seeing any meaningful increase in wages.

"Despite another upgraded growth forecast from the IMF, I believe significant challenges lie ahead."

Samuel Tombs, of Capital Economics, said: "On most historical and international comparisons, the UK's recovery still looks fairly feeble.

"It only took a maximum of four years for output to return to its previous peak after all peacetime recessions in the 20th century.

"And the UK is the second-to-last G7 economy in which output has reached its pre-recession peak.

"Nonetheless, we remain optimistic on the scope for the UK economy to maintain its current growth spurt."

Howard Archer, of IHS Global Insight, said: "Going forward, it is important for prolonged healthy expansion that business investment sustains its recent marked improvement and that exports increasingly contribute, thereby allowing growth to be balanced."

Lee Hopley, chief economist at EEF, the manufacturers' organisation, said: "Policy-makers can't yet afford to take the summer off.

"We still have a hill to climb in building the right conditions for companies to invest in and, export from, the UK.

"This includes pressing ahead with measures to secure a more highly skilled workforce, accelerating improvements in access to finance and working on the pipeline of new infrastructure projects."

Joe Grice, chief economic adviser at the ONS, said: "The economy has now shown significant growth in six consecutive quarters and the long climb back to the pre-crisis peak of 2008 has at last been completed.

"It is worth noting, however, that changes this autumn to the way countries measure their GDPs may yet modify our view of how slow the UK's recovery has been."

Today's figures were the last preliminary estimate of quarterly GDP to be published under the current national accounts framework, before changes to the methodology come into effect in September.

Some economists expect these to show that the economy surpassed its pre-crisis peak earlier.

Prime Minister David Cameron described the figures as a major milestone but stressed that the Government's work was not finished yet.

On a visit to brand management company Pentland in north London, he said: "I think, thanks to the very hard work of the British people, we have reached a major milestone in our long-term economic plan.

"But absolutely the work isn't finished yet, the country suffered hugely from the Great Recession and there's more we need to do."

Deputy Prime Minister Nick Clegg said he was very proud of the coalition Government for "rescuing the British economy", but acknowledged that there is a "long way to go" before people feel the benefits of growth.

Joining the PM on the visit, Mr Clegg said: "This is why we created the coalition Government back in 2010, to rescue the British economy.

"And the fact that the British economy is now as large, if not slightly larger than it was just before the crisis happened, shows that the rescue mission that we said was the principal purpose of this Government has worked.

"But of course there's more to do and there's a long way still to go before people feel personally the benefits of this growth.

"I'm immensely proud of the fact that having said four and a half years ago - remember what it was like then, the economy was on the edge of a precipice, people were predicting mass unemployment, there were riots on the streets of European capitals - the fact that four and a half years later the rescue mission has worked, and we can now move on to renew the British economy, is something I'm very proud of."

CBI director-general John Cridland said: "With confidence rising and businesses investing, we're starting to see a recovery built on solid foundations. We now have a strong launchpad to propel the economy forward.

"Our surveys have indicated that growth has been broad-based across sectors. The latest GDP figures show that the service sector performed strongly and manufacturing output continued to rise.

"While it has been a disappointing quarter for the construction sector, we expect this to pick up, with demand for new housing still high.

"While there are still risks to growth at home and abroad, we are hopeful the economy will keep motoring along at a steady pace for the rest of this year and next. Now it's important that we ensure everyone shares the benefits of growth, and this is a priority for business."

TUC general secretary Frances O'Grady said: "The economy may finally be back to where it was in early 2008 but pre-crash living standards are a long way off. Workers are still, on average, around £40 a week worse off.

"Despite stronger growth, the Government's plan for further sharp spending cuts means that the scaling back of vital public services, from library closures to the squeeze on NHS spending, is now looking permanent.

"The Government is overseeing economic growth driven by low pay and low productivity. This is the wrong kind of recovery and won't deliver the higher living standards and sustainable growth that Britain needs."

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