But this ‘knicker elastic’ recovery may yet snap back at the first hint of bad news, warns Bill Jamieson
How quickly – very quickly – the cycle can turn. Back in January, the outlook was bleak. Business surveys were appalling. We seemed destined for a triple-dip recession. Business confidence was on the floor and the forecasts were dire. All this on top of horrendous problems with deficit and debt.
Today, that picture has changed markedly. We have gone from bumping along the bottom through reluctant recovery to an evident and broad-based improvement. But dare we trust it? Before we get carried away with euphoria, this good news carries with it a potentially deadly trap.
We have escaped a triple-dip recession. And revisions to previous figures suggest there may have been no second recession at all.
For months, labour market data and figures on numbers in work have continued to surprise on the upside. Private sector employment has been stronger than expected.
Yesterday brought figures showing Scotland outperforming the UK on all three labour market indicators of employment, unemployment and inactivity rates.
Headline employment rose by 47,000 in the three months to April. And unemployment has fallen for the seventh consecutive month, with the rate now down to 7.1 per cent. In fact, we’re doing better than the UK as a whole – and the UK figures have also shown a sharp improvement.
Yesterday’s figures showed UK employment climbing, by 24,000 in the three months to April while ILO unemployment has fallen back. Claimant count unemployment has now fallen for seven consecutive quarters.
And here’s a strange fact about “recession-hit Britain”. Our workforce participation rate in recent quarters is the highest for more than 20 years.
Now, I have been a business and financial journalist for more than 40-odd years. I thought I knew all there was to know about the business cycle. But history never repeats itself exactly; each cycle is different. The cycle never loses its capacity to surprise. And this one, glacial though it has been to arrive, has certainly surprised. The biggest validation came this week when the Organisation for Economic Co-operation and Development revealed that its leading indicator for the UK has risen further and that growth could soon be back to its trend rate.
Latest purchasing managers index data from the Bank of Scotland this week showed a marked improvement in the health of the private sector economy. May saw solid and accelerated increases in both output and new work inflows at Scottish businesses, as well as the fastest rise in employment for more than a year.
Growth of private sector business activity in Scotland accelerated at the fastest pace since April 2011. Both factory production and service sector business activity rose at faster rates, the sharpest in 12 and 13 months respectively. The pace of economic expansion was broadly in line with the average across the UK as a whole, while the level of new business has now risen for six months running.
Economic pundits are raising their forecasts. Howard Archer of Global Insight has upgraded his UK GDP prediction from 0.8 per cent to 1 per cent and to 1.6 per cent for 2014. For Scotland, the Fraser of Allander Institute has been forecasting growth of 0.8 per cent for 2013 and Ernst & Young just 0.7 per cent. Tony Mackay of Inverness-based Mackay Consultants is on 1.5 per cent. I expect these numbers to move upwards before long.
Why do I believe this? The purchasing managers’ survey for the dominant services sector hit a 14-month high in May with the new business index at a 39-month high. The PMI survey for manufacturing showed a second successive month of expansion with activity at a 15-month high, while construction activity showed the first growth, albeit modest, since last October. Industrial production remains sluggish, but it is growing, following decent gains in March and February.
Consumer confidence rose markedly in May to be at equal highest level for two years. Last week, the British Retail Consortium’s survey showed retail sales up 3.4 per cent year on year.
Car sales climbed 11 per cent year on year in May, while in the housing sector both the Halifax and the Nationwide reported a moderate increase in house prices.
The biggest barrier to growth has not been feeble bank lending, but the poor level of business confidence. But now this may change. The hope is that all this will work to fuel a sustainable improvement in business and consumer confidence, which in turn encourages businesses to invest and employ more, and consumers to spend more.
Confirmation of an upturn in UK business confidence came this week with latest readings of the BDO optimism index showing business confidence is at its highest point since May 2012, pointing to improved business conditions for the rest of 2013. This index has moved up for the fourth consecutive month. BDO’s output index also improved in May, to an 11-month high. The output index for manufacturers showed particular improvement. And improving confidence is feeding in to businesses’ hiring intentions.
Now all this is relative, of course. We are coming off a very low base. Output is still well below the level at which we stood when the global financial crisis hit. The economy has been flat-lining or, as some more colourfully describe it, bouncing along a corrugated bottom.
And it is still in historic terms the longest delayed recovery in modern economics. In the recessions of 1980-81 and 1991-92, it took 13 quarters for output to recover to its level before the recession began. In the 1930s Great Depression, it took 18 quarters. Today, it is set to take 27 quarters before output is back to where it was in 2008.
At home, domestic demand has been depressed by the squeeze on incomes. Households have suffered a real terms fall in their spending power. As for export prospects, these have been blighted by continuing recession in the eurozone. And we still have horrendous problems with the budget deficit and the continuing growth in the government’s overall net debt.
So, we have plenty of reasons not to expect this recovery to conform to those of past periods. It will be – as recessions triggered by financial crisis always are – slower to get back to pre-crisis levels of output.
So, what could go wrong? Just this: the stronger the evidence of recovery, the sooner the likelihood of an end to quantitative easing and a rise in interest rates from their ultra-low, crisis levels.
This week, the Ernst & Young’s Item Club predicted that consumer spending growth will reach 2.2 per cent by 2015 – back to the level it was before the financial crisis. Its economist, Peter Spencer, says spending on entertainment and leisure is expected to grow by 5.9 per cent this year.
But this could be a “knicker elastic” recovery: likely to snap back on any bad news. And a return to rising interest rates would certainly be bad news. It would, he says, be “back to meal deals and nights on the sofa”. So, take heart for now – but be ready to take cover.