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Economic recovery could now be on the way Economic recovery could now be on the way
(4 months later)
Services make up three quarters of Britain's national output so the sharp increase in the June purchasing managers' index for the sector bodes well for growth, not just in the second quarter but for 2013 as a whole.Services make up three quarters of Britain's national output so the sharp increase in the June purchasing managers' index for the sector bodes well for growth, not just in the second quarter but for 2013 as a whole.
The Office for Budget Responsibility predicted at the time of the budget that Britain would grow by only 0.3% this year. That now looks overly pessimistic, not just as a result of the better than expected service sector PMI – which recorded its fifth successive increase – but because other recent data have suggested that the economy has turned the corner.The Office for Budget Responsibility predicted at the time of the budget that Britain would grow by only 0.3% this year. That now looks overly pessimistic, not just as a result of the better than expected service sector PMI – which recorded its fifth successive increase – but because other recent data have suggested that the economy has turned the corner.
It is, of course, too soon to say. Britain could easily be blown off course again by events in the rest of the world. The eurozone is in recession, while activity in both the US and China is slowing. Consumers' real incomes remain under pressure as a result of prices rising faster than wages. Deficit reduction will, as the IMF noted, act as a brake on growth this year.It is, of course, too soon to say. Britain could easily be blown off course again by events in the rest of the world. The eurozone is in recession, while activity in both the US and China is slowing. Consumers' real incomes remain under pressure as a result of prices rising faster than wages. Deficit reduction will, as the IMF noted, act as a brake on growth this year.
But in the past few days there have been reports showing a pickup in the three big sectors of the economy – services, manufacturing and construction.But in the past few days there have been reports showing a pickup in the three big sectors of the economy – services, manufacturing and construction.
Consumers are not exactly in party mood, but they are a lot less gloomy than they were. Inflation is coming down, which means the real income squeeze is far less powerful than it was a year ago.Consumers are not exactly in party mood, but they are a lot less gloomy than they were. Inflation is coming down, which means the real income squeeze is far less powerful than it was a year ago.
The service sector PMI is, though, perhaps the strongest piece of evidence that recovery is under way. The two percentage point jump in June was far bigger than expected and took the index to its highest in more than a year. The improvement was broad-based.The service sector PMI is, though, perhaps the strongest piece of evidence that recovery is under way. The two percentage point jump in June was far bigger than expected and took the index to its highest in more than a year. The improvement was broad-based.
Why is this happening? A combination of factors, in all likelihood. Four years of cheap money – bank rate at 0.5% and £375bn of quantitative easing – are having an impact. The funding for lending scheme is channelling money into the mortgage market. After years of making do, companies are having to replace bits of kit. Consumers, fed up with being fed up, are starting to spend a little more freely.Why is this happening? A combination of factors, in all likelihood. Four years of cheap money – bank rate at 0.5% and £375bn of quantitative easing – are having an impact. The funding for lending scheme is channelling money into the mortgage market. After years of making do, companies are having to replace bits of kit. Consumers, fed up with being fed up, are starting to spend a little more freely.
Growth in the second quarter is, as a result, likely to accelerate from the 0.3% in the first three months of 2013 to perhaps 0.5% or 0.6%. Something close to 1.5% for 2013 would then look eminently feasible.Growth in the second quarter is, as a result, likely to accelerate from the 0.3% in the first three months of 2013 to perhaps 0.5% or 0.6%. Something close to 1.5% for 2013 would then look eminently feasible.
Historically, that would be no great shakes and would still leave activity below its peak in early 2008. But everything's relative; it was only six weeks ago that the speculation was about a triple-dip recession.Historically, that would be no great shakes and would still leave activity below its peak in early 2008. But everything's relative; it was only six weeks ago that the speculation was about a triple-dip recession.
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