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It's the 25th of July and the quarterly GDP figures
have finally arrived. What did they show? They showed quarterly GDP growth at
0.6 percent,
which is a really encouraging improvement
and something, actually, which shouldn't have surprised us too much. The overall amount of
money
out there in the economy, which sloshes around the overall cash and bank deposits figure,
has been accelerating over recent months and that is a leading indicator
of economic activity. So for the first time, really, since the onset of the
financial crisis,
the economy looks and feels as if it's got a tailwind behind it.
What challenges remain? Can the growth rate
be maintained? Well, in the short term yes it can, I think it could actually
even improve.
I think the wuarterly growth rate could accelerate. The performance of broad money in the
first half of this year
suggests the second half of 2013 is going to be quite good.
Nothing extreme, nothing which is going to get us too excited.
We may get marginally above trend growth, so there's not gonna be
any huge swing in the economy, or real
reduction in the amount of spare capacity which forces the Bank of England
to tighten monetary policy sharply,
nothing like that. Why do I say that? Because there are significant headwinds out
there as well.
There's continued debt and deleveraging problems
in the private and the public sector. We know the banking system
is weak already and there are actually further pressures on the banking system
which actually could put downward pressure on the money supply
next year. So those are all dampening forces on the economy
and there are two other very powerful influences as well. One is the squeeze
on incomes in the household sector, with inflation running ahead of earnings,
and also at this stage of an economic recovery, ordinarily
there'd actually be quite a high wall of money in savings to draw down on
as consumer confidence picks up, but this time around it's different to the 80's or
the 90's recovery.
The savings ratio is lower than it was then. It can still fall back a little bit
further,
but we don't expect it to fall back too much and that's a restraint on economic growth,
because consumption is the number one item within economic growth
and so if households aren't strong in terms of their income growth or their savings
levels, that's gonna have,
obviously, less of a dynamic feed through onto consumer spending on the high street.
And there's also one final factor: the ever-present looming threat of the euro
crisis,
and will it or won't it return to the front pages of the newspapers and the
top of the news.
There's obviously ongoing uncertainty there, which could feed back into business investment
in particular.
So, whilst we expect a pretty good second half to 2013 and maybe
the early part of 2014, we're gonna see some sort of levelling off we think that after.
What happens if i'm wrong and growth exceeds wildly all my forecasts? Well,
I think there's a very simple rule here.
The faster economic growth is,
the sooner we'll see a normalisation of interest rate policy,
and that means the sooner we'll see higher base rates,
and the sooner we'll see an end and even a reversal of quantitative easing.
So, faster growth equals
faster normalisation of interest rate policy. Now, having said that,
I'm reasonably confident, no, I'm very confident
that we're not gonna see any aggressive tightening in policy
because of those four headwinds and they are gonna prevent the
need for the Bank of England to act in that way.
But of course, if it does, then all we're gonna see is a more pronounced cycle.
This recovery has within itself the seeds of its own destruction.
The stronger it becomes, the more pressure on the Bank of England to
normalise monetary policy.
So either way, it slows. The question is,
does it get a little bit more perky in the meantime, but the end result is at some
stage over the 2014/15 period,
I think the economy slows, which is very interesting because that will mean
we've really had a recovery without any sustained period of above trend growth,
which would be, clearly, very different compared with previous recoveries.
So the new normal is very weak,
subdued growth, actually, it's not gonna be excessive growth
and that's what happens, that's what economic history teaches.
In the wake of the financial crisis, it's painful
and it's drawn out, but thankfully with the latest GDP figures,
we've got more optimism than we've had for a very long time.