Economy in quick recovery
GDP growth outpaces Western countries, surprising experts, writes Richard Warren
Britain has emerged from a double-dip recession, brought on by the 2008 credit crunch, to become the Western world's fastest-growing economy. According to the Organisation for Economic Co-operation and Development (OECD), Britain's GDP will expand 3.2 per cent this year, which is more than in Germany, the United States or any other of the OECD's 34 members of economically advanced countries.
The rapid GDP growth reflects the British government's partial success at rebalancing its economy away from dependence on property, the public sector, financial services and consumer spending, and onto exports, manufacturing output and business investment. Westminster wants to rebalance the economy to turn trade and budget deficits into surpluses.
Britain's performance has surprised a lot of people. The International Monetary Fund (IMF) has been forced to drop its criticisms of British economic policy in light of the country's rapid GDP growth. Last year, the IMF said higher public sector investment was needed to stimulate the economy, but now concedes it "underestimated" GDP growth and admits policies aimed at reducing state spending are "appropriate".
Although consumer spending has contributed significantly to British GDP growth since recovery started in the last quarter of 2012, business investment and manufacturing have grown important.
Samuel Tombs, Britain economist at the consultancy Capital Economics, says companies had paid off their debts during the recession and were now investing in their businesses at an accelerating rate because of their growing confidence in the country's economic future. "We've now seen investment push up quite strongly over the past four or five quarters by 2 per cent a quarter," he says. "There will be double-digit annual growth in the coming years."
By spending money on machinery and other capital goods for their factories, the investment by these companies is helping to push up manufacturing output. Manufacturing grew at 1.3 per cent in the first quarter of this year, which is faster than the 0.8 per cent overall growth in the same period. "Manufacturing is growing faster than GDP, mainly because of domestic demand for both consumer goods and capital goods," Tombs says.
Although the trade deficit has narrowed, exports are not growing for two reasons, Tombs says. First, demand in the country's biggest overseas market - the euro zone - is weak, and second, a rise in the value of sterling has made British goods and services expensive abroad. Tombs expects British exports to rise when the euro-zone economy recovers more strongly from the recession.
And the resurgent property market is lifting growth. Nationwide Building Society figures show home prices rose 11 per cent in the 12 months to May. "The stronger trend in residential property transactions has been particularly significant in supporting higher consumer spending on household goods," says Simon Rubinsohn, chief economist at the Royal Institution of Chartered Surveyors.
But Britain's housing market is overheating, the IMF warns. Tighter lending restrictions introduced by the Financial Conduct Authority and the withdrawal of cheap mortgages under the government's Funding for Lending scheme is starting to dent homebuyer demand. The Bank of England says mortgage approvals fell for the third straight month in a row in April, to 62,918, down nearly 13,000 from peak levels at the start of this year.
Tom Bill, head of London residential research at Knight Frank, says Britain's strongest housing market, London, was becoming quieter. "Prime central London price growth is slowing and, in wider London, demand is starting to soften, so a slowdown in the market is already starting to happen," Bill says. "In Belgravia and Knightsbridge, demand is already falling. Where that goes, the rest will follow."
Rubinsohn says the Bank of England might take further action to cool the housing market. This might include ordering banks to retain more capital so they lend less to mortgage borrowers. The government may end its Help to Buy scheme, which guarantees 20 per cent of a mortgage for some home purchases or provides 20 per cent of the equity for others.
Yet Tombs believes Britain's economic recovery is not dependent on mortgage borrowing or other types of credit. Household debt levels, though high, have fallen to levels last seen in 2003, because Britons paid off some money they owed during the recession and are taking out few loans.
The government's current account is also looking healthier. The national budget deficit has been cut from 13 per cent to 6.6 per cent since the coalition took office in 2010. "There is still a long way for the fiscal squeeze to go," Tombs says. "We are only halfway through consolidation, but it can be achieved."
In the financial sector, Britain's banks remain weakened by the effects of the 2008 credit crunch. The Bank of England says the country's banks are on course to build up sufficient reserves to withstand future economic shocks, but two big players - Lloyds and RBS - remain part-owned by the government since it bailed them out during the financial crisis, and they are being cut back in size. Barclays is closing its investment banking division.
Nevertheless, London remains Europe's financial services capital and is a global leader in foreign exchange dealing and metals trading, with overseas finance firms expanding operations there.
While the financial sector struggles, technology industries are booming. Symbolically, most new demand for office space in the City of London, home of the financial sector, now comes from technology firms. Half of Britain's tech businesses expect to hire more staff over the coming year, according to the KPMG/Market Tech Monitor UK Report.
While much attention is focused on east London's Tech City, where 1,300 digital companies operate, tech clusters are appearing in other parts of the British capital, including Croydon, and beyond, with Oxford, Cambridge and Brighton. According to PWC's sixth annual index of 30 global cities, London is in several tech disciplines, including software development.
Looking ahead, the OECD is forecasting a GDP growth of 2.7 per cent in 2015. But Rubinsohn says economic expansion would ease. "GDP growth in 2015 may struggle to quite match the performance likely to be notched up this year, but will still be above the long-run average."