Is there any hope for our economy? Are there signs of economic recovery?

 

Unlike our athletes in Team GB and the Tour de France, our economy has not yet reached full fitness. However the big picture is one of a gradual recovery, although we are undoubtedly navigating through choppy waters and the storm clouds continue to roll in from the euro area.

 

Whatever positive spin the politicians try and put on it, there is no escaping the fact that growth has been at best broadly flat over the past two years and has continually disappointed expectations of recovery.

 

There has been much comment in the press in recent months about the dangers of being overly fixated on economic growth.

 

While these arguments have merit, the unfortunate reality is that with the economy now 4.5 per cent smaller than it was four years ago, and with the reduction in taxation revenues and high unemployment, the coalition’s plans to reduce the national debt will be in tatters if the flat economic growth picture continues for much longer.

 

The big question is where is the much needed growth going to come from?

 

The coalition’s hopes for a rapid exportled recovery on the back of a strong global growth appear to have all but disappeared.

 

The recession in the euro area and the banking crisis show no sign of ending and may get worse before they get better.

 

Uncertainty in the US in the run up to elections has dampened confidence there, and the Chinese economy is now growing at a more pedestrian pace.

 

Cause for optimism

 

So if we cannot rely on the global economy to pull us out of recession, what are the prospects for a domestic-led recovery? Well there appear to be some grounds for cautious optimism here.

 

Firstly, the long squeeze on household incomes looks set to start easing in the coming months. The rate of inflation has nearly halved in the last 12 months and is now within touching distance of the two per cent target set by the Bank of England. This means that the decline in real incomes that we have seen for several years now should slowly start to reverse and this will have a positive impact on consumer confidence and demand in the economy.

 

Rising employment

 

Secondly, the labour market has continued to show signs of life. There was a 200,000 increase in the number of people in employment, and a reduction of 46,000 in unemployment, in the last quarter despite a 0.5 per cent contraction in growth. The Bank of England described this as baffling which puts me in good company. Whatever the cause, and despite the reduction in productivity which is implied by this, given the strong link between employment prospects and consumer confidence, this should be seen as positive news.

 

Thirdly, the prospects for an increase in bank lending look to have improved. A major concern in recent months has been the rise in bank funding costs, related to the euro area crisis. The new Funding for Lending scheme introduced by the Treasury and the Bank of England is bigger and bolder than previous initiatives to get the banks lending again. It is early days but the indications are positive, and some rate reductions have been seen.

 

To summarise, it seems that however fragile the recovery may feel, many of the conditions necessary for a gradual recovery are in place. However, time will tell and there is no avoiding the fact that the next quarter’s growth figures will be key. If there is another period of contraction the government will almost certainly have to dust off plan B.