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Andrew Lilico: Some thoughts about the improving UK economic data

The UK economic data released over the summer have been extremely strong.  The most closely-watched survey numbers suggest that the construction sector is growing at its fastest since the spike of 2007, manufacturing output at its fastest since 1994, the services sector index at its higest level since late 2006.  The overall "composite" combination of these data is the strongest on record.  The last time manufacturing output was growing as strongly as this, UK GDP was growing at four and a half percent per annum.

UK GDP, which grew at 0.7% in the second quarter of 2013 (on a broad basis including investment growth not just household consumption), now appears likely to grow at above 1% in Q3.  In the detail of the survey data, business investment and orders for intermediate goods were particularly strong, indicating that investment may accelerate further.

This improving growth outlook has been achieved so far without any material expansion in bank lending.  In my view, we should expect more rapid growth in bank lending to follow on from recovery.  With just a little normalisation in output, from the extended deep recession and slow recovery so far, bank balance sheets should be expected suddenly to look much stronger as the risk of businesses and households defaulting on their debts fades with improving economic prospects - especially if banks anticipate that interest rates will stay low for an extended period, as the Bank of England has attempted to promise via its new "forward guidance" (wherein it has effectively indicated it does not intend to raise rates from their current 0.5% until late 2016).

If we add in accelerating lending growth to an already-rapidly-growing picture, GDP growth similar to that in 1994 (some four and a half percent that year) would become less laughable than it would have seemed nine months ago.

We should expect George Osborne and the government in general to take a political dividend from this (at least until the inflation arises, which will happen for the reasons I have explored many times before and will not repeat here).  He will claim he held his nerve and stuck to his plan when all around him others predicted disaster if he did not change course.  He will say that Labour first said his economic plan would plunge the economy into further deep recession (which it did not) and then switched to claiming it would mire the economy in perma-slump (which it did not) and that Labour's understanding of how the economy works is therefore demonstrably flawed and its economic judgements should not be relied upon.

And, for a while at least, the public will listen.  The public will say: "Labour knows how to squander money in the good times and eventually horlicks up the economy but, say what you like about how heartless or out of touch the Conservatives are, at the end of the day they know how to sort out Labour's messes."

Labour's narrative is in terrible trouble.  It wasted three years attacking the macroeconomic consequences of spending cuts when it should have focused upon the cost of living and upon challenging the government's priorities for spending cuts.  It has finally discovered the cost of living, but because it has switched to that line so late, even that will now give it a problem.  For Labour, the "cost of living" seems to be code for "wages should rise", not "taxes are too high".  But wages outside the public sector grew slower than inflation for years before the Coalition came in.  And what is Labour going to say now if wages do start accelerating?  Will it welcome that, even if a spurt in wage growth is associated with rising inflation?

If inflation comes in on Osborne's watch, he will suffer politically for that.  But Labour's credibility may be so damaged by that point that it is not Labour that gains even as Osborne loses.  Will the public really say: "There are some touch decisions to take to get inflation down, some of which may be very unpopular and even mean slow growth or recession in the short term.  Who shall we send for when a tough call needs to be made?  I know!  Ed Miliband!"?

All is far from well with the British economy.  I expect a fully-fledged old-fashioned inflationary boom-bust cycle, including inflation at levels many of us had forgetten were possible and mass unemployment to follow.  But that is all two, three, maybe five years away.  For now, and (barring some further international economic disaster so severe it derails events here, as the Eurozone did in 2011) for the next eighteen months to two years, George Osborne will take his well-earned plaudits.  Who knows?  Perhaps by the end even the "next leader?" whispers may return...?


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