Macroscope | Britain’s boom running on empty and ready to stall

Quite often striking success is only superficial and fails close scrutiny. Outside observers could easily envy the UK’s economic record over recent years, boasting a blistering growth rate, plunging unemployment and a booming housing market.

Britain was the fastest growing of the biggest developed economies last year, so it is hard to imagine much of a problem.

But Britain is sitting on a time-bomb. The economy looks in poor shape to deal with the onset of slower global growth. Recession risks are rising, deflation remains deeply embedded and Britain’s yawning trade and budget gaps leave little scope for possible policy antidotes.

Longer term, the picture looks unsettling. Two potential structural shocks lie in wait. The UK government is set on a collision course with Brussels over its EU membership, which could eventually lead to a damaging exit from Europe. Meanwhile, independence pressures are still bubbling up in Scotland. Both events could inflict cataclysmic future blows on the economy.

Credit rating agencies are watching from the sidelines and are not impressed. Britain’s highly-regarded international reputation and top-notch credit ratings are at stake. UK financial markets and the British pound have a lot to lose.

Having been the pin-up poster economy in recent years, the UK now looks vulnerable. The UK economy lost momentum in the third quarter with quarterly growth slowing to 0.5 per cent in the past three months, compared with 0.7 per cent in the previous quarter.

A sharp fall in Britain’s bellwether construction industry was the main culprit for the slowdown. But another tell-tale sign of trouble ahead was a 7.1 per cent slump in steel production in the third quarter. Even before the recent round of closures in the British steel industry, the slump in global steel demand has been a worrying trend.