|George Osborne had good reason to celebrate on Thursday. The triple-dip recession was averted. Growth of 0.3pc in the first quarter was even better than the optimists dared hope. And Britain’s vital services sector edged further above its pre-recession high.
But one thing he could not claim was that the UK was rebalancing. Which is what he did. “We are building an economy fit for the future,” the Chancellor said.
The economy, as described by the Office for National Statistics (ONS) figures yesterday, looked very much like the Britain of the past. The services industry, home to bankers and lawyers, motored on with 0.6pc growth while manufacturing trailed in its wake, contracting 0.3pc. Government spending grew by 0.5pc. And farming fell deep into recession, shrinking by 3.7pc.
“Once again we’re seeing the service sector having to do all of the heavy lifting and, within that, consumers and the Government continue to play a major role,” Andrew Goodwin, economic advisor to the Ernst & Young ITEM Club, said. “What we’re seeing is unbalanced growth, but beggars can’t be choosers and unbalanced growth is better than no growth at all.”
Faced with a manufacturing sector struggling into the headwind of collapsing exports to the troubled eurozone, the Chancellor has tacitly decided the rebalancing can wait. “What’s missing has been demand, lending and confidence,” Gerard Lyons, chief economic adviser to the Mayor of London, said. Policy is now squarely directed at those missing ingredients.
The help-to-buy scheme in the Budget was designed to underpin the housing market – promising owners firmer prices and housebuilders more customers. The Bank of England’s Funding for Lending scheme was meant to ensure cheap credit was available for both households and businesses, removing financing concerns. Both should boost confidence.
Lifting the personal allowance to £10,000 by next year has taken 3m out of income tax altogether in just four years, releasing more spending power by those who shop on Britain’s high streets rather than invest in Asian stock markets. On top of which, compensation by banks for the payment protection insurance scandal has effectively been an £11bn stimulus package for households.
Time has also helped. Household debt, at 146pc of income, is now back at 2004 levels and sharply lower than its 175pc peak in 2008. As the ITEM Club has pointed out, the consumer is ready to start making a big contribution to economic growth again.
Taken together, it makes a compelling case to believe confidence will return. Better-than-expected first quarter growth will have underpinned that. According to a survey by Bibby Financial Services, 29pc of small and medium sized companies are waiting for proof of growth before investing. Yesterday they got it. If it releases the £750bn cash pile business is sitting on, renewed confidence could be richly rewarding.
Despite the quiet strategy switch, Treasury sources insisted that rebalancing was not dead. It’s just that it is happening within the services industry, which accounts for 77pc of UK output. Growth in “transport services and telecommunications” was 1.4pc in the first quarter, while banking and business services managed just 0.2pc. It was no accident that the Chancellor was at London’s Tech City yesterday.
It will be some time before the broader rebalancing towards manufactured exports beds in, though. After a strong rebound in 2010 and early 2011, Britain’s factories fell back into recession, where they have remained for almost two years. The industry, which accounts for 10.5pc of total UK economic activity, is 10pc smaller today than it was in 2008.
The problem is a familiar one. Weak demand for UK exports in the eurozone has hit manufacturers, on top of which recent sales to emerging markets have been poor. But – with the eurozone forecast to contract this year – there is little the authorities can do about it, bar encouraging the pound down through quantitative easing.
Ideally, when export demand does return, the economy will get another shot in the arm.
It’s not just manufacturing, though. Construction has also continued to weigh on growth. The industry shrank by 2.5pc in the quarter and remains 18.1pc below its pre-recession peak. The Government is trying to counter the downturn with its housing schemes, to kick-start housebuilding, and by promising more infrastructure spending.
North Sea oil has taken its toll on the economy, too. Unscheduled shut downs caused a 10.7pc contraction in the industry in the final quarter of 2012. It rebounded with 3.2pc growth in the last three months, and there could be more as the massive Elgin field comes back on line this year, BNP Paribas’ David Tinsley pointed out.
But the industry has contracted every year for the past decade as reserves have dried up, so should be expected to drag overall growth lower this year. Excluding the North Sea oil effect, the recovery has been better. On that measure, economic output is just 1.7pc below its pre-crisis high, Henderson’s chief economist Simon Ward has estimated. On the official ONS measure, the shortfall is 2.6pc.
As Capital Economics’ Vicky Redwood pointed out, the UK is not out of the woods yet as the recovery still looks “quite feeble”. But, after yesterday, the Office for Budget Responsibility and the International Monetary Fund’s respective growth forecasts of 0.6pc and 0.7pc this year look pretty low.
One more strong quarter could result in an upgrade for the Chancellor. Now, that would be a first.