The Bank of England has raised its growth forecast for the first time since before the financial crisis. It now expects GDP to expand by 1.1%, rather than 0.9%. This followed a run of encouraging data, which has fuelled hopes that growth is finally rebounding.
Surveys tracking the manufacturing, services and construction sector all rose in April, with the services sector now above the level that separates expansion from contraction.
Barclaycard said consumer spending has risen by more than 2% year-on-year for three months in a row, the first time this has happened since 2011. New house buyer enquiries hit a three-year high. The Confederation of British Industry (CBI) said “the UK economy is moving from flat to growth”.
The claimant count of unemployment even fell to a two-year low in April, although a wider measure of unemployment rose in March.
What the commentators said
Sir Mervyn King assured us that the recovery is “in sight”, said Marcus Bullus of MB Capital. That’s true, “if you are peering through the Hubble space telescope”. Of course, he was inclined to be bullish for his valedictory Inflation Report press conference, but the big picture hasn’t changed. His prediction that the bank rate will stay below 1% for four years “hardly hints at confidence”.
The tone of the latest data has improved, added Capital Economics, but let’s keep this in proportion. The fact that the CBI is now saying growth could be 1% this year is hardly something to get too excited about: it’s dismal compared to past recoveries. And it’s “hard to see where any sustained growth will come from”.
Inflation-adjusted earnings are set to keep falling for the rest of the year, which bodes ill for consumption; bank lending growth “is still fairly subdued”; and our key trading partner, the eurozone, continues to shrink.
Despite the poor backdrop, however, there has been a measurable decline in pessimism in consumer polling, said Allister Heath in The Daily Telegraph. The key reason seems to be that George Osborne’s strategy to reinflate house prices is “rekindling homeowners’ animal spirits”.
“Directing subsidised credit into the housing market… is an absurd, reckless policy which suggests Osborne has learnt nothing from the subprime crash.” If this gamble bolsters overall activity, we will be back to basing growth on private debt and it will inevitably “end in tears”.