History suggests rocketing British growth won’t last long
Britainâ€™s economy is steaming ahead – by one measure faster than any other large developed or emerging economy â€“ but history suggests it will struggle to sustain the rapid growth indicated in business and confidence surveys.
Data this week showed British businesses were at the forefront of Europe’s nascent economic recovery, outpacing major euro zone peers that are still grappling for momentum.
British services companies enjoyed their fastest growth since December 2006 in August, according to purchasing managersâ€™ surveys, while housing market activity is gaining, and consumer sentiment is at its highest in almost four years.
Of particular note was the Markit/CIPSÂ UK services PMI, closely watched as a barometer for economic growth, unsurpassed by equivalent surveys in any of its G20 peers.
The index topped the 60 mark â€“ far above the 50 threshold for growth â€“ for the second month in a row. The last time that happened was in 1997.
Back then, the services PMI held above 60 for seven months in a row.
And that purple patch was fully borne out in economic growth at the time â€“ the UK economy achieved quarter-on-quarter growth of at least 1.0 percent throughout 1997.
If that were to be repeated over the next few quarters, that would bring the economy back to its pre-recession peak in a year or so â€“ itâ€™s still around 3 percent smaller than its early-2008 peak.
However, that strong, lengthy upturn is unlikely to be repeated. Further parallels with 1997 show why.
For one thing, 16 years ago Britain was about to enter a decade-long housing boom that saw a tripling in the price of the average house, driving Britainâ€™s consumer engine in the process.
And although house prices are rising now, in part thanks to government stimulus to boost access to the market, some economists are worried it is reflating an asset bubble that only half-burst when the economy crashed in 2008-09.
Furthermore, the jobs component of both manufacturing and services PMIs showed slowing hiring, while wage growth is still tepid.
Inevitably, those factors will keep a lid on growth.
However, there are a couple of similarities with 1997â€™s year of prosperity.
The record-high May 1997 UK services PMI came just before the inaugural meeting of the Bank of Englandâ€™s Monetary Policy Committee.
As one Reuters article from June that year shows, the strength of the survey posed policymakers at the newly-independent central bank with a problem â€“ whether to hike interest rests at its first meeting, shortly before the outcome of the first Budget under Tony Blairâ€™s New Labour government. In the end, they voted to hike by 25 basis points.
The August 2013 PMIs will also give MPC members pause for thought, even if they aren’t under yet pressure to raise interest rates from their record low 0.5 percent.
Governor Mark Carney has stressed the economy needs a lot more help from the central bank to nurse it back to health, and the bank does not plan to raise interest rates until unemployment falls to 7 percent, something he forecasts is at least three years away.
Some investors and analysts are not convinced he will be able to keep rates low for that long:
â€śGiven the strength in orders, rising business optimism and a pick-up in investment intentions and employment hiring surveys we look expect the BoE to be forced into tightening monetary policy well before the Q3 2016 date that they are currently suggesting,â€ť said James Knightley, economist at ING.
â€śWe are currently forecasting H1 2015, but the recent data flow suggests it could potentially be even sooner than that.â€ť
Graphic by @ReutersFlasseur