Comment: Chancellor entitled to glass of GDP bubbly

George Kerevan
George Kerevan
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YOU could hear the Champagne corks popping in Downing Street as the Office for National Statistics revised upwards its calculation of UK economic growth in the second quarter to a breezy 0.7 per cent.

This is more than double the figure for the first three months, prompting a normally cautious Treasury to claim the economy is “moving from rescue to recovery”.

Second-quarter growth in the United States and eurozone was similarly encouraging, so I think a glass of bubbly is warranted. But just how strong is the recovery going to be? The Treasury has just published its compendium of the latest independent forecasts for UK growth, which gives us an educated guess.

The average growth forecast for 2013 is 1.2 per cent, with a low of 0.8 per cent and a high of 1.4 per cent. I think the 0.8 per cent is too pessimistic judging by the new second-quarter data, which has gross domestic product (GDP) up 1.5 per cent on the 12 months to 30 June.

That suggests that the higher-end 1.4 per cent growth estimate for 2013 may be correct, or even bettered if there are strong Christmas retail sales.

What about 2014? The average of growth forecasts puts GDP expansion at 1.9 per cent, which is nudging into the healthy range. The upper end of the forecast range is 2.7 per cent but it would take strong growth in Europe to put it up that much. Anything above 2 per cent and Osborne will be looking forward to the general election with relish.

The Treasury analysis also covers inflation. For this year, the average forecast rise in the price level is 2.9 per cent on the retail prices index. Ouch. For next year, the figure is even higher, at 3.1 per cent.

Put another way, the forecasters think your savings and real wages are going to be sliced in real terms.

If these independent forecasts are suggestive of people’s views on prices then everyone thinks inflation is going to get worse. Since the 2009 recession, there has been an absence of the usual wage militancy. A combination of stronger growth and inflation could change that. Paradoxically, a rise in real wages might be the very thing needed to secure genuine recovery.

Taper capers give us a new word – ‘Septaper’

Here is a new word for your dictionary: “Septaper”. Global markets are holding their breath to see if the US Federal Reserve will start “tapering” its £55 billion monthly bond purchases at its September meeting – hence the neologism. The bond purchases are linked to American unemployment, which fell to a five-year low on Thursday, suggesting an imminent taper.

However, when Fed chairman Ben Bernanke so much as hinted at tapering in June, global equity markets lost £2 trillion in a week.

No wonder that the FTSE 100 index has fallen for three straight weeks in anticipation of the Fed’s September meeting.

Fear of Septaper is also causing waves in the currency markets. Former favourites Brazil and India have seen their currencies tumble as US and European investors exited emerging economy stocks.

Brazil’s real, India’s rupee and South Africa’s rand have fallen by some 15 to 18 per cent against the dollar. This week Brazil announced it was spending £40bn to prop up the real.

What will September bring? Best bet is that the Fed will taper monthly bond purchases by a modest amount – say, £6.5bn – and see how the markets react.