Britain is undergoing the wrong sort of recovery

The British economy grew by 0.8% in the third quarter of 2013, the fastest quarterly rate since the spring of 2010. All of the major sectors of the economy contributed, with manufacturing and construction growing faster than services (which comprise 78% of the economy).

In addition, mortgage approvals hit a five-year high and the Ernst & Young Item Club predicted that household borrowing would expand this year for the first time since the credit crunch.

What the commentators said

The economy is finally gaining momentum, said Capital Economics, but there’s a long way to go. GDP is still 2.5% below the pre-crisis peak. At this rate it will get back to par in late 2014.

At this stage in typical post-war recoveries, GDP was between 6% and 13% above its previous high. Still, for now at least, we are “enjoying a period of healthy and well-balanced growth”.

Yet the overall recovery can hardly be described in that way, said Larry Elliott in The Guardian. The service sector has just about regained its pre-crisis output peak but industrial production and construction have struggled. They respectively declined gently and flatlined in the years before the recession and are both 15% below their peaks.

Then there’s business investment, added Elliott, which slumped by 25% in the crash and has since flatlined. Companies have employed cheap labour rather than stock up on new machinery. “Britain is a nation of zero-hour contracts and an ageing capital stock.”

Meanwhile, consumers have begun to borrow and spend more, dipping into their savings to do so. It won’t be long before they are once again borrowing against the rising value of their houses.

Politicians keep talking about more balanced, sustainable growth, but what we’ve ended up with is “measures to boost demand in what remains in many sectors a profoundly supply-constrained economy”, said Jeremy Warner in The Daily Telegraph. And it could soon become overheated.

The government’s Help to Buy scheme, which is fuelling the housing boom, and the Bank of England’s policy of nailing interest rates to the floor for years, “are beginning to look dangerous in the current environment of fast-recovering demand and credit”.

This unsustainable upswing “is a recovery, all right”, concluded Warner, but “not the one the doctor ordered”.

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