Economy growing – but Britain not out of the woods

The latest figures showing the economy growing by 2 per cent a year should put a smile on the chancellor’s face.

Instead he has issued a warning: “The job is not done, and it is clear that the biggest risk now to the recovery would be abandoning the plan that’s delivering jobs and a brighter economic future.”

In other words, if we want the recovery to continue, austerity must continue, with another £25bn of public spending cuts – £12bn from the welfare budget – to eliminate the deficit.

As George Osborne said in January, with his politician’s hat on: “Government is going to have to be permanently smaller, and so too is the welfare system.”

After three years in which the economy flatlined, and the chancellor was accused of choking growth by cutting public spending too fast, he no doubt feels he is being proved right – that his medicine is finally working.

Predictably enough, Labour disagrees, but the chancellor’s cabinet colleague Vince Cable also has his doubts.

‘Rebalancing’

In a speech on Monday, Mr Cable said there was a danger the recovery could prove short lived if it was underpinned by debt-fuelled consumer spending and a housing boom in London and the south east.

He called for a “rebalancing” of the economy and said weak exports and business investment threatened this goal.

Although the latest growth figures are encouraging, the economy is still 1.3 per cent smaller than it was before the 2008 banking crisis, which led to a deep recession.

At its deepest, the size of the economy had shrunk by a staggering 7.2 per cent, and it has taken years for it to make up most of this lost ground.

Manufacturing up

But this does not tell the whole story. Had the economy grown at a “normal” rate during the fallow years, it would have been considerably bigger in 2014. So arguably there is even more ground to make up.

In fact, the economy is 4 per cent smaller than the Office for Budget Responsibility forecast in the June 2010 emergency budget.

Vince Cable is not alone in calling for a “rebalancing” of the economy. George Osborne also wants manufacturing and exports to contribute more to UK plc.

Manufacturing came to a standstill in November, while the monthly trade deficit was more than £3bn. The latest figures from the Office for National Statistics show there was an improvement in the last three months of 2013, with manufacturing rising by 0.9 per cent.

But one set of statistics does not tell the full story. Simon Kirby, an economist at the National Institute for Economic and Social Research, told Channel 4 News: “It is not the balanced recovery the government was hoping for in 2012. But let’s not kid ourselves – number one, we need a recovery.

‘Consumer driven’

“It is consumer driven and entirely dependent on rising consumer spending. There’s an absence of robust business investment and net trade is negative.”

But Mr Kirby said this could change in 2014 with recovery in the eurozone, Britain’s biggest trading partner.

“When you see a robust recovery in the euro area, that will filter through into relatively robust UK export growth.”

There are other reasons to be optimistic. Inflation has dropped to its 2 per cent target for the first time in over four years, easing the pressure on the Bank of England to increase interest rates and putting a little more money in people’s pockets.

At the same time, unemployment has fallen to a five-year low of 2.32 million. The only problem is that further falls could lead to a rise in interest rates, which would drive up people’s mortgages just when earnings may be surpassing inflation for the first time in years.

What can be predicted in the months ahead is continuing uncertainty. Britain is emerging slowly from the woods, but could end up retreating back again – and George Osborne knows it.