Friday's preliminary GDP estimate for the second quarter of 2014 shows an economy growing at 0.8% a quarter, and recovering it's pre-recession level of output. It would be wrong to take this as a sign of 'business-as-usual' however, when fundamental problems with the UK economy remain. These need to be addressed before we can return to a more sustainable footing for future growth.
Most of the commentary around these figures has focused on the fact that the UK has returned to its pre-crisis level of output. But it's difficult to take that as a sign of economic resilience when the time taken to reach this point, more than 70 months, has been far longer than any other UK recession in the last 100 years. While IMF forecasts suggest that UK growth in 2014 will be among the fastest across the advanced economies, that is not going to be enough to recover the ground lost through such a lengthy downturn; We estimate that the economy remains around 13% smaller than it would have been had growth continued at trend rates from 2008 onwards.
While today's figures do not give a great level of detail about the composition of growth in the second quarter, it's clear that the recovery we are having is driven far more by the services sector and domestic consumption than by manufacturing, business investment and exports. Indeed, while we may have recovered overall output, manufacturing is more than 5% below its pre-crisis level, and business investment in the first quarter was 15% lower. Exports, according to the ONS, have "remained largely flat since mid-2011". While the Office of Budget Responsibility forecasts growth in these areas, particularly investment, it is most likely not going to be until mid/late 2015 before they have recovered. Consider this alongside retail sales, which are already considerably higher than in 2008, and the fact that services are growing at two and half times the rate of the production industries, and you have a picture of an economy that, far from making its way in the world, is still in sore need of some re-balancing.
This has not been helped by the poor performance of earnings in recent years. While the UK's jobs growth has been described as a "miracle", the fact remains that we have never before seen such a sustained fall in the real earnings of employees, which is continuing even as the economy recovers. The jobs growth we've had has also been marked by a surge in the numbers of the self-employed, whose earnings also fell markedly between 2008 and 2014. Both these points are likely to have helped restrain the Bank of England from any sudden rise in interest rates up to now. But, as Gavin Kelly points out, it is inevitable that rates will go up over the medium-term as growth returns. What is less clear is whether the large numbers of low and middle income households with sizable debt burdens can cope with such a change in policy. If this were to have a knock-on effect on consumer spending, it would not be good for the UK's economic outlook.
The growth shown in Friday's figures is welcome, with the UK economy finding its groove in what should be a good year for growth. But until the full recovery spreads to business investment, exports, and the wages of working people, we should refrain from celebrating too much.
Spencer Thompson is a senior economic analyst at the Institute for Public Policy Research (IPPR)