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Six reasons why Britain is booming again

UK economy to go off like a rocket (with caveats!)

I continue to think the UK economy will surprise ‘to the upside’ in 2010, as city boys – and rappers – like to say.

Today’s booming manufacturing PMI figure will be shocking if you’ve read too many gloomy pundits still partying like it’s 2008.

Yet this jump from one superficially meaningless number to another (to 56.7, for the record) represents:

  • Manufacturing activity expanding at its fastest rate for 15 years
  • New orders rising at their quickest pace for six years
  • Output growth back at mid-2006 levels

And this recovery has been going on for months!

Six reasons why UK PLC is growing again

True, the economy is partly ‘rising’ like a zombie climbs out of a grave. GDP fell for six quarters – the worst run on record. The only way was up.

Yet I think the recovery will prove both real and strong, helped by the following factors:

1. Sterling is low

A weak currency is a boon, provided you don’t need to spend your money overseas. It makes the stuff we export cheaper, and it makes overseas earnings more valuable. (Remember, 70% of FTSE 100 earnings comes from overseas). The last time the pound was this low was in the mid-1990s, and that started a boom, too.

2. Unemployment is already falling

UK unemployment stands at 2.46 million – far below the 3 million peak predicted. Moreover, 7,000 fewer are unemployed compared to the previous figure. Yes, a lot of people are watching Loose Women who’d rather be working, but unemployment is a lagging indicator. It’s not ‘meant’ to start falling until the economy has recovered. (So perhaps it already has?)

3. Interest rates are crazy low

Mervyn King will have to write a letter soon when inflation heads above 3% – yet the central bank rate is just 0.5%. Partly rates are low because inflation is thought to be a blip (we’ll see!) but they’re also low to support the banks. Low interest rates nearly always boost economic activity, and the affect is lagging, too.

4. QE has done *something*

There’s a lot of debate about quantitative easing, mainly because we know as much about it as a ten-year old boy knows about a clitoris. But it’s had an affect – almost to the day it was announced, panic was averted and asset prices began to rise. It’s yet another lagging stimulus.

5. The financial sector is booming

We heard a lot about how the UK would fall harder because of our massive financial sector, and we did – until banks began bathing in the honeyed waters of cheap Government money. Now bankers are getting bonuses and the curse has turned into a blessing.

6. Growth will likely be revised upwards

UK GDP only grew by 0.1% last quarter. Some boom, eh? Well, scary as it is to agree with Dark Lord Peter Mandelson, I think he’s right that GDP will eventually be revised up. Not next month – in several years time. The same thing happened in the last UK recession, perhaps because of our big services sector.

Remember, we’ll pay later

I’m not claiming the UK hasn’t been through the wringer, nor that we’ve finished paying for the boom that preceded the credit crisis.

We’ve borrowed from our future selves to get going again. We’ve done it directly via Government debt and ongoing deficits – which we’ll pay for in higher taxes – and by taking on the broken banks Northern Rock, RBS and Lloyds (the last of which we’ll probably sell for a profit).

We’ve also probably stoked up future inflation. The weak pound will mean more inflation when consumers start spending again, and reality will eventually hit the over-valued UK gilt market. Both factors will push UK interest rates back to their higher ‘natural’ levels.

Growing public and private debt will constrain consumption and tame future expansion. We’re richer now than we expected to be 12 months ago, but we’ll be poorer in five years than you might imagine.

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{ 2 comments… add one }
  • 1 The Investor February 1, 2010, 3:37 pm

    Update: An Example of a gloomy pundit living in 2008, in my opinion – this article yesterday from Roger Bootle:

    http://www.telegraph.co.uk/finance/comment/7121412/A-weakening-recovery-poses-the-real-threat-of-a-double-dip-recession.html

    I agree with him about the housing market (and see my closing comments about interest rates) and the snow is an interesting point, but in general it’s a very one-side view typical of the doom-mindset still prevalent.

  • 2 Niklas Smith February 1, 2010, 6:25 pm

    Interesting post. Nice to see some optimism (at least for the short term) backed up by sound arguments. People who say QE was not a success because broad money has not returned to pre-crisis growth rates are silly – the choice was between shrinking money supply (no QE) or stable money supply (with QE). Given the damage to the banking system it’ll be a long time before the money multiplier returns to pre-crisis levels. In fact, it may never do so because of higher capital requirements and more realistic risk-weighting.

    I’m beginning to think that this implies that excessive inflation is not a big risk for the next few years: if we can’t expect sudden broad money growth and if unemployment will remain high, where could inflation come from? The fall in the pound is a one-off inflationary hit (unless sterling goes into a steady slide, which I doubt).

    P.S. Apparently the Bank of England has stopped publishing figures for M4 (broad money supply) – at the same time as they began QE! My lecturer said she and other people have had to cobble together estimates from other data that the Bank publishes. I have no idea why the Bank thought stopping the publication of M4 statistics was sensible!

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