Free exchange | The British economy

March of the builders

The latest GDP figures reveal a British recovery, led by

By C.R. | LONDON

SINCE the start of the financial crisis Britain's economy has been on a roller-coaster ride. GDP sank 7.2% over six consecutive quarters in 2008 and 2009. It bounced back strongly in 2010 and 2011 (see chart, below-left). But by late 2011 the economy had tumbled into a double-dip downturn, thanks to strong headwinds from the continent and domestic austerity measures; the economy grew just 0.2% in 2012.

But lately the news has improved, buoying the spirits of George Osborne, Britain’s beleaguered Chancellor of the Exchequer. On October 25th the Office for National Statistics announced that the British economy grew 0.8% in the third quarter: a 3.6% annual rate and the fastest pace since 2010. In the first nine months of the year, the economy grew 1.8%, beating consensus forecasts. Analysts are expecting the spell of good growth to continue, unlike the “dead-cat bounce" of 2010 when growth was not sustained. Consumer and business surveys are upbeat; people think the economy will continue expanding rather than stutter again. Citigroup, a bank, now expects Britain’s economy to grow by as much as 3% in 2014.

Strong growth may boost the public finances, but the news is not all good for Mr Osborne. In the 2011 budget he promised a recovery that would rebalance the British economy towards manufacturing: “a Britain held aloft by the march of the makers”. But something appears to have gone awry. Looking at the sectoral breakdown of the growth figures, production industries grew in only one quarter out of eight in 2011 and 2012, whereas service industries grew in all but one (see chart, below-right). As a percentage of GDP, services have continued their steady rise against production since 2011.

The latest set of good figures has dashed hopes the next phase of the recovery will be more balanced. Growth in Britain’s oversized banking, retail and construction sectors continued to outpace its factories. Manufacturing grew only 0.9% in the third quarter, compared with growth of 1.0% in financial services, 1.3% in retail, and a whopping 2.5% in construction.

The government’s policies appear to be contributing to rather than pushing against this imbalance. The Bank of England's monetary policy programme and a funding-for-lending scheme designed to raise bank lending to the real economy have boosted economic activity, but commercial loans have not grown by nearly as much as those for mortgages. Help-to-buy, a subsidised loans scheme to help people buy a home, seems to be stirring up a housing market that already looked quite frothy.

Indeed, some now worry that the economy may be overheating, or that property prices at least are growing unsustainable. House prices in England are now higher than they were at the height of the last bubble in 2007. Some service sectors, such as hairdressing and building, are reporting shortages of skilled labour. And a YouGov poll released on October 24thsuggested that inflation expectations have surged from 2.5% to 3.2% in just one month, the highest single-month jump on record.

It is too early to say yet whether the British economy has reached terminal velocity and is on the way to making a full recovery from the recession. The economy is still smaller than it was before troubles began in 2007. But however much Mr Osborne would like to turn Britain back into the workshop of the world, it seems that Britain is still as much a “nation of shopkeepers” (to borrow Napoleon’s famous saying) as before the recession. And bankers and builders, as well.

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