Britain’s growth rate returned to Mach 2 speed in the spring and early summer.
That’s the consensus among City analysts ahead of official figures out this week, handing George Osborne another golden arrow with which to shoot down his critics.
It is the re-emergence of the big-spending consumer (who snaps up a new bed and sofa while ordering a case of wine) that is likely to have prevented the UK economy from repeating the lacklustre growth rate of 0.4% seen in the first three months of the year.
Most analysts expect the Office for National Statistics to report on Tuesday that GDP jumped by 0.7% for the three months to the end of June. That’s an annualised GDP increase of 2.8%, which is enough to put supersonic Britain streets ahead of its developed-world rivals.
Yet a peek beneath the data reveals a picture that Osborne and the interest-rate-setters in Threadneedle Street ignore at their peril.
Based on what we already know from the official figures and those published for individual industry sectors, the main boost to the second quarter figures will come from the very same source of weakness in the first quarter – the North Sea.
Last year saw a dive in North Sea oil and gas production as operators reacted to the dramatic fall in crude oil prices. In recent months, rigs taken out of action for maintenance have come back on stream, encouraged by a moderate recovery in prices (though they are falling again now, along with other commodities) and a more generous tax regime announced by Osborne in the March budget. The result was an enormous 9% increase in output between the first and second quarters.
Making matters worse, manufacturing is in the doldrums. Since last summer, growth has slowed to a point where output was actually lower than the year before (down 0.4% from May 2014 to May 2015). Great hopes for pharmaceuticals makers, specialist textiles and machinery manufacture have been dashed. Mining and quarrying is in decline and metal smelting has all but disappeared.
Filling some of the void are the stellar motor and aerospace industries, which prevent Britain’s manufacturing from being limited to the output of a few niche products. The services sector is also doing its bit: from hotels and leisure to the health sector and online shopping, businesses are expanding and taking on more workers. They are even reporting skills shortages despite there still being more than 1.8 million unemployed. Pay has also rebounded and, according to official figures, wage growth is averaging 3.2% while inflation remains flat, giving workers a welcome income boost. So that’s a dose of good news at least.
Is it enough to warrant a smile on Tory faces? Bank of England policymakers seem to think so. They are preparing to raise interest rates in the expectation that higher real wages will send inflation rocketing. But those among the nine monetary policy committee members who prefer to ignore weaknesses in the UK’s growth story are likely to be embarrassed. If rates go up in November or possibly next February, the betting must be that they will soon come down again.
With higher interest rates must come a higher pound. It is already strong against the euro; if there is another surge on the foreign exchange markets, billions of pounds’ worth of exports could be priced out by cheaper competition. Much of this loss will be felt by manufacturers. GDP will suffer.
More importantly for the MPC’s inflation-watchers, a higher pound will make imports cheaper and bring down prices, which resurrects the threat of deflation and thus the need for an interest rate cut.
The embarrassment of cutting back rates after a bold rise is something the Swedes and Canadians know all about. Their central bankers tried it and – in the case of Sweden – now have negative interest rates for their trouble. So surely it would be better for the MPC to hold fire. Then the UK’s still-weak economic recovery can keep climbing.
Tories need to get climate change story straight
Amber Rudd, the energy and climate change secretary, is a true Janus: the Roman god famous for facing in two directions at the same time. In her first major speech on global warming on Friday, Rudd insisted climate change was a dangerous threat she took most seriously and which would be tackled for the sake of families and businesses alike.
But this was the same Rudd who earlier in the week had overseen the scrapping of the Green Deal scheme to make homes more energy efficient and the end of certain solar subsidies.
She has already scrapped financial aid for onshore wind – the cheapest of all renewable energy technologies – and has overseen the lowering of taxes on polluting companies while ending tax breaks on cleaner cars.
Most of these measures, argues Rudd, can be taken because the subsidy schemes are not working properly or because wind and solar are so successful they don’t need support anymore.
She also claims to be standing up for “hard-working families” by cutting energy bills. Rudd also wants to see free-market solutions, not state or consumer-funded ones – although different rules seem to apply to nuclear power.
But many see an ideological cuts agenda barely concealed behind consumer-champion rhetoric. It is true the Conservatives publicly promised to be the “greenest government ever”, but privately admitted it wanted rid of “the green crap” .
The real truth is that tackling global warming costs money, even if more of the cost comes via the taxpayer than through higher energy bills. But we need to pay now rather than leave subsequent generations to face the devastating and much more costly impact later on.
Global warming is a threat that has not been and cannot be tackled by any pure free-market solution. It cannot be driven by companies worried about three-monthly financial cycles, or be achieved in a world where fossil fuels do not pay for the damage they cause.
For a party that claims to support business and the commercial imperative, it is also astonishing to see the rug being pulled from under the renewable energy industry just as this job-creating sector really takes off.
Should Hornby be derailed?
A parliamentary commission into who was to blame for the near-collapse of HBOS in 2008 said the bank’s chief executive Andy Hornby had “proved unable or unwilling to change course” to save it from bankruptcy.
It is not yet known what a report by the City regulators into the debacle will conclude, as it is long-delayed and no publication date is in sight. But shareholders have always maintained that there should never again be a place for Hornby on the board of a listed company. Since 2011 he has been chief executive of bookmaker Gala Coral. While it was privately owned, that was no problem. On Friday it merged with Ladbrokes to become a market-listed business. Hornby will not be on the main board, but will be chief operating officer. It is now up to City shareholders to decide if he should be given a second chance.
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