Today’s GDP numbers will certainly have made people sit up and take notice. After fully eighteen months of recession, and then six months of limp, lacklustre recovery, the UK economy performed admirably in Q2, reporting stonking growth of 1.1% on the quarter overall. At last, the recovery appears to have materialised properly.
Certainly, today’s figures are cause for celebration. But, before anyone gets too excited – and I am thinking here in particular about politicians and monetary policy makers – it is worth putting these data in a bit more context.
Perhaps the most important number in the detail of today’s release was for the service sector, which posted growth of 0.9% in the second quarter. Services make up 76% of the UK economy, so to see this economically dominant sector again posting at or above trend growth is particularly encouraging. On top of this good services figure, manufacturing posted growth of 1.6% – the third consecutive quarter that growth has exceeded 1% – and construction did a real trampoline, bouncing up 6.6% in the three months to June.
However, the recent volatility of these construction figures, in particular, highlights the dangers of putting too much weight on these data. The UK economy is still struggling to find its equilibrium at the moment, and, as it gets there, we were bound to see some strong and some weak numbers. Indeed, the US saw strong growth some time ago, but policymakers there are rightly still worried that it will not be sustained. And, to put today’s data into context, the growth in Q2 means that the UK economy probably caught up with the euro area, in terms of the declines seen in both economies since the start of 2008, and the subsequent return to positive growth. Catching up with Greece, Italy, Spain and co puts a slightly different gloss on the numbers – and it is worth bearing in mind that the UK economy is still almost 5% smaller than it was at the start of 2008.
Furthermore, we have yet to see the impact of the June Budget on the broader economy. Today’s figures were backward looking, and probably reflect further inventory moves on the expenditure side, although consumption may also have benefitted from the World Cup. But what matters more for the UK economy, inflation and interest rates, is whether today’s pace of growth will be sustained going forwards. With thousands of public sector jobs set to be lost over the next few years, one quarter of strong growth is not enough to ensure that unemployment does not start rising again.
Overall, then, today’s figures are encouraging, and a clear sign that there is still life in the UK economy. But we need to see sustained above-trend growth for several quarters before we can really be sure that we are on the right track. We shouldn’t get too excited by one batch of figures, no matter how good they are.