We can forgive the government for enjoying their moment of satisfaction on the release of GDP figures yesterday that showed the economy had grown by a full one per cent in the third quarter.
The UK has emerged from its double-dip recession after the economy grew by one per cent in the third quarter ending in September. The data was helped by a 0.50 per cent rebound from lost activity in the second quarter as a result of the Queen's Diamond Jubilee and a 0.2 per cent increase from Olympic ticket sale receipts.
The Treasury, and the Prime Minister, David Cameron and the Chancellor, George Osborne, were careful not to sound self-satisfied and admitted that though the figures show the economy is on the right path, there is a lot of work to do.
George Osborne said: “Britain is recovering from a very deep banking crisis. But today you can see that the British economy is on the right track.
“There are plenty of risks out there. Look at the data from the eurozone this week that shows us that there is still a difficult economic situation in the world.”
Shadow Chancellor, Ed Balls, who was yesterday forced to admit that there was a structural deficit in the UK economy in 2007, said: “Our economy desperately needs an injection of confidence. But this is no time for complacency and wishful thinking.”
Chris Williamson, chief economist at financial data provider Markit said: "The government will most likely make the most out of this good news, but unfortunately it is unlikely that the UK will see such a strong performance again for some time."
They were right to sound a note of caution. Yesterday’s figures were welcome but still only mean that the UK economy has been flat for the past 12 months.
Admittedly, a full one per cent growth was on the high side of most estimates but once the catch-up in activity and accounting for the Olympic ticket sales is taken into account, the economy only grew by 0.3 per cent.
What happens next?
What is vital is what happens next. If the UK economy can eke out similar growth in the final quarter of 2012, matching the third quarter’s underlying growth of 0.3 per cent, then there could be a real reason to celebrate. This would cement the UK on a genuine path out of recession into long-term growth.
Graeme Leach, chief economist at the Institute of Directors, said: The key message is that we're out of recession but uncertain where we're going. Our view is that growth will continue in Q4 but we have to recognise there could be a fallback."
At the moment, there is as much chance of falling back into a triple-dip recession as there is of recording growth in the next two quarters.
John Cridland, CBI Director-General, said: "We expect conditions to remain positive going into the fourth quarter, reflecting some easing of the pressure on household budgets from lower inflation. But the global economic environment remains challenging."
However, Bank of England Deputy Governor, Charlie Bean was more optimistic: “Looking at the UK economy, the expectation is growth should be picking up. There is bound to be volatile movement from quarter to quarter, but the underlying trend is for growth.”
Let’s not forget the Governor of the Bank of England, Sir Mervyn King’s prediction of GDP for 2013 in the Bank’s last Quarterly Inflation Report. He cut the growth forecast from two per cent to 1.5 per cent and warned that growth is likely to zig-zag up and down over the next year.
If the economy achieved that level of growth in 2013, that would be pretty good and it would be great if for once in the last four years a prediction on economic growth by anyone did not have to be revised down.
However, it may not be easy to follow up the third quarter numbers with growth in the next quarter and yesterday’s data showing one per cent growth was only the first estimate and is likely to be revised.
At least the impact of the one-off factors has now worked its way through the GDP figures and hopefully we can get a clear indication that the economy is improving in the coming months.
Azad Zangana, European Economist at Schroders, said: "Whether the better than expected numbers continue into the fourth quarter is difficult to judge.
"Overall, when considering the positive contribution from the temporary factors included in the latest number, underlying growth in the economy appears to be running at about +0.3% for the third quarter. “That is not strong enough to shield the UK from the external risks that partly contributed to the latest recession.
“In our view, the UK remains at high risk of a ‘triple-dip' recession in 2013 as domestic austerity continues and external demand is hampered by the Eurozone sovereign debt crisis.”
US Presidential Election
Globally, the economy will be affected by the United States. It is just a few weeks until the election in the US. Once that is done, hopefully the incumbent will focus on reducing the US deficit before automatic tax increases and spending cuts are delivered.
Azad Zangana said: “In addition, there is great uncertainty about the implications of the US ‘fiscal cliff' after the presidential elections in November.”
Euro debt crisis
The next major obstacle for global economic growth is the euro debt crisis. This is probably the most vital element impacting on the likelihood of the UK economy emerging from its double-dip recession with steady growth in 2013.
So far, there have been few grounds for optimism that the underlying causes of the euro debt crisis are being effectively addressed. Attempts at imposing austerity measures in the troubled economies of Greece, Spain and Italy have met with resistance and the debt is being contained not reduced. The IMF and other organisations also increasingly take the view that austerity measures could be coming at the expense of growth.
So, the signs are not promising in Europe and an increase in exports to the UK’s biggest market is one way our economy will get the sustained, steady growth that we need so badly.
Funding for Lending Scheme
The construction sector has been a major burden on the UK economy in the last six months and an increase in activity in the property market would be one way of improving fortunes in this sector.
So far, the signs again are not very positive. 13 banks have signed up for the FLS scheme but so far the cheap lending they have been able to access has been reserved for borrowers with high levels of equity in their properties and not used to fund cheaper mortgages for first-time buyers that would drive new builds that would be of more benefit to the wider economy.
Reasons to be cheerful, 1,2,3,4
However, there are reasons to be cheerful for the government and for the UK economy, just as there are plenty of reasons to be pessimistic. Several important planks have been nailed into the government’s plans for the economic recovery.
Firstly, employment has remained strong and the last set of figures out last week showed that the UK now has more people in work than at any time since records began in 1971 and the unemployment rate fell to 7.9 per cent.
Secondly, inflation fell last week to 2.2 per cent, the closest it has come to the Bank of England’s target of two per cent for 34 months. One caveat here is that energy price rises, poor harvests in the US that will increase the cost of food and likely rises in the cost of petrol are likely to cause inflation to rise again.
Thirdly, last week’s public borrowing figures were another timely boost. They were lower than expected and give the Chancellor a fighting chance of meeting his own fiscal targets of a borrowing figure of £120 billion for the 2012-13 tax year.
Finally, Yesterday’s GDP figures show that once all the one-off factors are taken into consideration it seems clear that there are low levels of underlying growth in the economy.
However, the economy is still smaller than it was five years ago before the financial crisis and credit crunch began in earnest. It seems like a lifetime ago now and the events, attitudes and actions that caused the crisis have had a huge impact on the everyday lives for all of us in the UK and the wider world.
Now, the real work begins.