Britain’s economic data continues to beat expectations. An index tracking activity in the service sector rose to its highest level since May 1997 last month.
A sub-index tracking employment in the sector is close to a record high, pointing to robust job growth. A survey covering activity in the construction sector reached a five-year high.
House prices are climbing at an annual rate of 6.9%, according to Halifax. Car sales rose for the 20th month in a row and business confidence has reached a ten-year high, according to an index developed by the Institute of Chartered Accountants. Industrial output was 2.2% up year-on-year in September.
What the commentators said
Earlier this year, there were fears of a triple-dip recession. Now, the latest surveys imply growth of around 1.5% in the fourth quarter alone, according to Capital Economics. That would be a sharp jump from the third quarter’s 0.8%. It would also point to an annualised growth rate of more than 5%, the highest in the G7.
An interesting feature of this rebound, noted Jeremy Warner in The Daily Telegraph, is that there hasn’t been much evidence of a sustained bounce-back in manufacturing, despite the plummeting pound. But manufacturing is worth only 10% of GDP, so this is “not ultimately where salvation lies”. More encouragingly, there has been rebalancing in the service sector, worth 78% of GDP.
Financial services and public administration, two key areas pre-crash, have shrunk, while health, professional, business and support services have all grown strongly. Our creative, media and digital industries are all thriving. We may not make very much, but “in services, Britain is streets ahead of virtually anywhere else”, said Warner.
Unfortunately, Britain’s post-war experience shows that we’re also streets ahead of other countries when it comes to generating high inflation. There are already some straws in the wind, such as the fastest pace of price rises in the services sector since May 2011, and the fastest growth in a measure of the money supply in almost ten years.
The latter “implies a lot more spending, sooner rather than later”, said Allister Heath in City AM. The economy is showing signs of overheating even though it’s not even back to its pre-2008 size.
The Bank of England should cool things off by hiking interest rates now. That would help ensure growth proceeds at a reasonable, sustainable rate. Otherwise, we risk a “mini-boomlet and bust, complete with a spike in inflation and another housing crash”.