Market Overview

Is the UK's Accelerating Economic Performance a Sustainable Recovery?

Is the UK's Accelerating Economic Performance a Sustainable Recovery?

The accelerated growth of the UK economy surely must be a good thing. Britain did manage to avoid falling back into recession at 0.3% in the first quarter of 2013, and the second quarter increased twofold amidst the IMF issuing a eurocrisis warning. Latest forecasts predict the short-term GDP growth to be 1.4% in final quarter of 2013, which will take UK GDP above its Q1 pre-recession peak in the second half of 2014. But, is it really time to let out a sigh of relief?


Background on UK’s GDP

According to Trading Economics, the United Kingdom GDP Growth Rate has averaged 0.6 percent from 1955 until 2013. It reached an all-time high of 5.3 percent in March of 1973 and a record low of -2.5% in June of 1958. The UK is one of the biggest manufacturers in the world, but production only accounts for 10 percent of the GDP.


Economy is in Britons’ hands

Like many developed nations, service is the biggest sector of the economy. It accounts for 75 percent of the total GDP. That grew by 0.7% in the third quarter. Output from services is now 0.4%, which is an increase from its pre-crisis peak in the first quarter of 2008. The global financial crisis plunged the UK into its deepest and longest recession since comparable records began in the 1950s.


A sigh of relief?

The accelerated growth seems like welcomed relief for a country that’s suffered weak growth or worse, over the last few years.  A strong performance would definitely be hailed as vindication for the government’s economic strategy.


Gaurdian’s prediction                                                                                                        The Guardian provided a prediction of the government’s position in light of the accelerated growth. The Treasury will try to maintain a cautious stance, but will claim the shadow Treasury’s dire predictions of mass unemployment to be proven untrue. Thereby, the Treasury will put the political squeeze on them. The shadow chancellor, Ed Balls, has already prepared the ground for the change of economic gear by highlighting the continued squeeze on living standards


A call for caution                                                                                                                                     I wouldn’t relax my purse strings just yet. With wage growth still stubbornly low and inflation persistently above the Bank of England’s 2% target, a sustainable economic recovery that is built on something more than increased consumer debt is difficult to see.The Nationwide Building Society’s chief economist, Robert Gardner, has warned that as prices are driven up at their fastest rate for three years while wages stagnate, the affordability of property is being stretched even further.


Housing bubble prospect

According to Hantec Markets’ Richard Perry,

“The Bank of England is already concerned over the prospect of a housing bubble. With private consumption making up the vast majority of economic growth, if the steam is taken out of the housing market, this could feed through to a stuttering recovery. Sterling has benefited on the back of this perceived economic recovery, and this could lead to questions over the sustainability of its elevated value.”


All the latest data amount to a more complex picture than the success of the Treasury’s economic strategy. We should see the accelerated economic growth as something to appreciate with caution.

The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

Posted-In: Forex Economics Markets


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