Friday, 23 July 2010

High-speed recovery in the UK

The UK grew at an unexpectedly strong 1.1% rate in the second quarter, according to the ONS.

Unexpected to the consensus of economists, that is - some of us are not so surprised. It has seemed clear - anecdotally, but from a wide range of conversations - that the economy has been fairly strong in the last few months - and with unexpectedly low growth in Q1, a rebound was already likely to show up the Q2 figures.

This means that over the last year, the economy has grown by 1.6% - including a quarter of negative growth in 2009 Q3. If this quarter's rate is sustained - which it probably won't be - we will have almost 3% growth from October 2009 to September 2010. Even if it falls back to 0.7%, we will still have achieved a 2.5% growth rate.

Despite George Osborne's sheepish attempts to take the credit - you can just tell that he knows better - this is a clear vindication of the last government's policies. Or rather, as Chris Dillow hints, it vindicates the last government's decision to keep their hands off the economy's automatic built-in stabilisers. Osborne has had the sense at least to delay the planned VAT increase until 2011, so consumption will have a chance to keep growing throughout the rest of this year.

Scott Sumner's favoured measure, nominal GDP, seems to have increased by approximately 6% in the last year, but we'll get a more precise figure later - the nominal figures aren't included in the ONS data release but I have inferred them from here and the linked data source. If this is true, it's a good number (though an extra couple of percent wouldn't hurt). Liberal Conspiracy thinks the government is planning to push up inflation to help solve its debt problems - if so, the economy would probably get a boost too.

The growth figure is good news in itself, but the best outcome would be if it improves people's expectations of future economic growth. There has been lots of (mostly sarcastic) talk about the confidence fairy recently. But expectations of future growth do affect current investment, and therefore future growth. Krugman's mainly criticises the "austerity claim" - the idea that cuts in government spending will themselves boost confidence. He is correct to cast doubt on this, but confidence is still an important factor in the economy and it will - I hope - be helped by today's figures.

The impact on confidence and expectations, unfortunately, is hard to predict. We don't really know how expectations are formed or how much evidence of growth people need before they believe it. See yesterday's post about rational expectations for some more caveats on this whole area.

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