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UK 'great recession' almost over, says economic institute UK 'great recession' almost over, says thinktank
(about 2 hours later)
The recession that has gripped the UK for six years is on the verge of being over after a leading economic body said the economy was almost back to its pre-financial-crisis peak. Britain is finally shaking itself free of the grip of the "great recession", a leading thinktank has claimed, as it said the economy was on the cusp of returning to its pre-crisis strength.
Growth will exceed its 2008 high in the next few months, the National Institute of Economic and Social Research (NIESR) said in a report. The National Institute of Economic and Social Research (NIESR) forecast benign inflation and falling unemployment, and said that the UK economy will regain its pre-recession peak in the next few months.
The institute predicts that GDP will grow by 2.9% this year, 0.4 percentage points higher than its estimate from three months ago. "It is quite important symbolically that the economy is, or will very shortly be, bigger than it was in 2008," its director, Jonathan Portes, told BBC radio.
Forecasts for 2015 to 2017 are about 2.4% growth annually, although GDP per capita remains well below its previous peak and is not expected to exceed that before 2017. "But, as far as individuals are concerned, what really matters is how rich we are – per capita GDP – and that's well below the level of 2008 and won't get back to its previous level for a couple of years."
Jonathan Portes, director of NIESR, told the Times: "The end of the great recession, it is an important moment. The British economy is very close to being bigger than it has ever been. Symbolically, that matters, and it comes at a time when growth is clearly entrenched." Its optimism about the near-term outlook was reinforced by official figures showing the manufacturing sector enjoyed a jump in production in recent months.
His colleague Jack Meaning, a research fellow at the institute, added: "We are incredibly close to the pre-recession peak. Whether we make it in the April estimate will be a matter of 0.1%." The Office for National Statistics said factory output rose 1.4% from January to March, up from 0.9% growth in the three months to February. That marked the best quarterly growth for almost 15 years, but the sector still has much lost ground to make up after the financial crisis hit output.
Growth accelerated rapidly after the marginal gains of 2012, NIESR said, and is running at about 3% year-on-year. News that much of the manufacturing growth in March came from the pharmaceutical sector will pile the pressure on David Cameron's government to fight AstraZeneca's corner as the UK company faces an unwanted £63bn takeover attempt from US company Pfizer.
But while wage levels are also expected to grow this year in real terms, they remain about 6% below what they were in 2009 – ground that is not expected to be made up until at least 2018. The ONS said output increased by 0.5% in March, with 0.3 percentage points of that coming from the manufacture of basic pharmaceutical products and pharmaceutical preparations.
Unemployment rates are also improving, falling by one percentage point over the last year. NIESR said it expected unemployment to average about 6.5% this year before dropping to close to 6% from 2015. In a separate ONS release on construction, statisticians doubled their estimate of first quarter growth in the sector, helping to buoy optimism about the overall economy keeping up momentum.
But despite the robust rise in employment, productivity growth has slowed. "The UK is heading for another strong quarter of growth and the recovery is broadening. Today's data were mixed but on balance still pointing to solid recovery," said Rob Wood, chief UK economist at German bank Berenberg.
"Even the return of GDP growth, however, has not yet resulted in significant productivity increases," the report said. NIESR revised up its estimate for GDP growth for 2014 from 2.5% to 2.9%. It forecast that unemployment will average about 6.5% this year and inflation would stay close to the Bank of England's 2% target.
"This matters in the short run, since without any improvement in productivity, robust economic growth will see spare capacity absorbed relatively quickly; it matters even more for the medium to long run since ultimately productivity is the main, if not the only, driver of real wages and overall prosperity." But the thinktank's report warned about the nature of the recovery and raised questions over whether it was being widely felt.
Inflation is also under control, NIESR said, in part because of constrained wage rises, and the institute expects inflation to remain around the target of 2%. GDP per head is still below its previous peak and will not exceed that level before 2017. Similarly, NIESR forecast real wages will grow this year, as average pay rises finally exceed inflation. But it noted that wages in real terms are about 6% below their 2009 level, and: "We do not expect them to make up that lost ground until 2018 or so."
On Thursday, the Bank of England announced it was keeping interest rates at their historic low of 0.5%, a level they have been at for more than five years. NIESR also echoed warnings from other economists about the UK's weak productivity, which has seen it lag far behind most other advanced economies in terms of output per hour worked.
The Bank also left the scale of its quantitative easing programme to boost the money supply unchanged at £375bn. Robust growth in employment combined with economic weakness in recent years had seen productivity drop sharply, the thinktank said, underscoring the rapid rise in self-employment.
It will update its own forecasts for GDP growth and inflation at its quarterly inflation report next week. "Even the return of GDP growth, however, has not yet resulted in significant productivity increases. This matters in the short run, since without any improvement in productivity, robust economic growth will see spare capacity absorbed relatively quickly; it matters even more for the medium to long run since ultimately productivity is the main, if not the only, driver of real wages and overall prosperity," NIESR's economic outlook warns.
The Organisation for Economic Co-operation and Development (OECD) has raised its UK growth forecast to 3.2% and sounded a warning that action might be needed to cool the housing market. It was also guarded on the prospects for net trade to drive growth. NIESR predicts the UK's trade position will get worse before it gets better. It warns the country's return to higher growth ahead of many other economies may mean that demand for imports outstrips export growth in 2014 and 2015.
Figures from Halifax showing a second consecutive month-on-month fall in house prices in April – though they were 8.5% up year-on-year – looked likely to ease concerns about an overheating market. "It is only from 2016 that we expect a positive contribution from net trade to return, as the global economy, and in particular, the UK's major trading partners, continue to strengthen," the report says.
On the basis of current monetary policy, the NIESR said it expected public sector finances to be in surplus by 2018-19. Official data released on Friday showed Britain's trade gap narrowed in March. The ONS estimated the deficit on trade in goods and services at £1.3bn in March, compared with a deficit of £1.7bn in February as exports of goods rose almost 5% on the month.
Portes told BBC Radio 4's Today programme: "It is quite important symbolically that the economy is, or will very shortly be, bigger than it was in 2008. But as far as individuals are concerned what really matters is how rich we are – per capita GDP – and that's well below the level of 2008 and won't get back to its previous level for a couple of years. David Kern, chief economist at the British Chambers of Commerce, said: "It is good to see that the trade deficit narrowed in March, and that the initial estimate for February has been revised down. But monthly figures are erratic, and a look at the first quarter of 2014 as a whole shows that the trade deficit only narrowed marginally compared with the previous quarter.
"In fact, real wages – take-home pay deflated by inflation – is about 6% lower than it was then and won't get back to its previous 2008 peak before, we reckon, another three or four years." "So while there are signs of a small improvement in the UK's international trade performance over time, the pace of change is still painfully slow."
He added: "We are back on trend, we are back on the previous path, but we haven't made up the lost ground. In previous recessions usually what has happened is that we've had a big bounceback, so you lose the output but not only do you grow faster than trend but you get back much of what you've lost relative to trend.
"We, and most others, are saying we are not going to get back a lot of that lost ground this time. We are going to lose maybe 10% or 12% of output compared to pre-recession trend."