Recovery in the UK will happen, but we must be humble about it
Two questions. Is the UK recovery real? And is it sustainable? It has become pretty clear that the answer to the first is yes, though you need to acknowledge the uneven nature of economic performance between the different regions.
But the answer to the second is more nuanced. If you focus on the demand side, we have a recovery led by consumption. If you look at the supply side it is one led largely by services. Both are fuelled by very easy money and that at some stage will have to be reversed, but for the time being you have to be very pessimistic not to admit that there is quite a lot of growth around.
There are two sorts of economic data. There is the macro-economic stuff, which obviously includes GDP and employment, and also the purchasing managers' indices (PMIs), which give the best forward-looking indicator for what is likely to happen in the next few months. This is all strongly positive. You can see in the left-hard graph what has happened to GDP, together with a growth indicator developed by the capital-markets team of Royal Bank of Canada, looking at these PMIs. That suggests growth in the third quarter, the one that has just ended, of 1.2% or nearly 5% expressed at an annual rate.
The other sort is the hard data – hard numbers of what has actually happened, things such as car sales and so on. These are also positive.
Indeed, September car sales at 403,136 units were the highest for over five years, up by more than 12% on the previous year. Another bit of hard data that is worth looking at is tax revenue. There are some distortions but one encouraging number here is that in the first five months of this financial year total tax revenues were up 8.4% on the previous year.
In August, VAT revenues were running 4.4% up, which is good news because VAT covers something like 40% of the economy. If that 40% has been doing all right, the chances are that the other 60% will have been doing OK too.
I find this pretty conclusive. It is not only boring to go around saying there is no recovery. It is plain wrong.
The more interesting issue is about sustainability.
The argument runs something like this: it is of course better to have a recovery than not have one, but in an ideal world growth would be sustained by a mixture of exports and higher incomes at home. We don't really have that.
But is very simple. If we can expand output rapidly to meet demand, then this growth phase will be much more durable than if we start running into bottlenecks in the next year or two.
The answer to that is we simply don't know – and we need to be humble about the limits of our knowledge.