Evidence points to green shoots at last

A wealth of good news and promising figures suggests that the economy may – just possibly – be on the up. Russell Lynch examines the pros and cons for an optimistic outlook

As any politician will tell you, over-hasty forecasts of rosy economic times ahead can be seriously bad for career prospects. Conservative Chancellor Norman Lamont was derided for his infamous "green shoots" comments while Britain was in the grip of a painful slump back in 1991. Labour minister Shriti Vadera fell into the same bear-trap three years ago in the midst of the deepest recession since the 1930s.

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But now – finally – the green shoots camp appears to be in the ascendant with a wealth of evidence in their corner so far in 2012. The confidence is infectious: the FTSE 100 has jumped an astonishing 20 per cent since early October, putting it in bull market territory. Across the Atlantic, the Dow Jones Industrial Average has punched through 13,000 for the first time since 2008.

After a surprising perky 1 per cent rise in retail sales during January, the public finances provided the latest cheer with their strongest surplus for four years, moving £7.8bn into the black. The Treasury clawed a record £60.9bn in tax receipts into its coffers, and the deficit for the financial year to date is £15.7 bn below last year.

Borrowing is likely to be around £10bn below the Office for Budget Responsibility's £127bn target in next month's Budget.

Internationally, the weather is also sunnier. The eurozone shrank for the first time since early 2009 in the final quarter of last year, but surveys point to a decent bounceback since then and confidence in Germany is on the up for the third month in a row.

Further afield, the US has shown a clean pair of heels to the rest of the West and its unemployment rate is now below that of the UK. In China, Beijing has cut banks' reserve requirements, soothing worries Europe's malaise will deal a significant blow to the world's second-biggest economy.

Back at home, the Bank of England predicts a "zigzag" year for growth as one-offs such as the Olympics have an impact on the figures. But deputy Governor Charlie Bean caught the upbeat mood yesterday as he put the nascent high street revival down to the easing pressure on the cost of living.

He told an audience in Scotland: "The long-lasting squeeze on household real incomes is also starting to ease. In turn, that should facilitate a modest pickup in household spending; the upbeat retail sales figures announced at the end of last week may be a sign this is already starting to happen."

Mr Bean also struck a note of caution which should give the green shoots brigade some pause for thought. The UK's recovery is likely to remain "moderate by historical standards" as the Chancellor keeps his foot on the spending brakes and households clear debts.

Expectations of fast-falling inflation this year dominate the Bank's outlook, and with consumer spending accounting for around two-thirds of output, Britain's prospects will depend on it.

However, the oil price is stuck at a nine-month high above $120 a barrel, pushed higher by restricted supply and strong demand from emerging economies. Any sustained spike is likely to exacerbate consumer caution as the cost of filling up eats into household budgets, blighting the recovery.

Economists also warn that the upturn in the UK's apparently healthier public finances is unlikely to be sustained. Borrowing may be lower this year, but the Office for Budget Responsibility has ratcheted up forecasts for the years ahead as much slower growth forces the Chancellor to tap debt markets for more funds.

The impact of the UK's 0.2 per cent decline before Christmas has yet to be fully felt in the Treasury finances, because they tend to lag the state of the economy. The Government is also shelling out more in benefits – £14.8bn in January – as unemployment sticks close to to 17-year highs.

Optimists point to UK trade figures showing the smallest deficit in eight years during December, bolstering the Bank's aspirations for an export-driven recovery. But on closer inspection the improvement came from an even bigger collapse in imports than exports.

Meanwhile the European Central Bank's emergency move to pump €489bn (£410.24bn) in cheap, three-year loans into more than 500 banks is papering over the cracks in a single currency bloc which accounts for 40 per cent of our trade and headed for recession this year.

European Central Bank president Mario Draghi's largesse may have averted a crisis, but the action fails to address the fundamental imbalance in the eurozone between the stronger, northern countries and the cripples in the south which is likely to create more turmoil.

So there are reasons for cheer, but many more to be fearful. Those slender green shoots may have to survive a few more frosts yet.

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