Is the economy growing or groaning?

Five key indicators for economic health can be seen two ways ... and that's the Bank of England's quandary, say Russell Lynch and Julian Knight

For the so-called dismal science, jokes about the economics profession and its shortcomings are legion. Winston Churchill once said that if you put two economists in a room, you get two opinions, "unless one of them is Lord Keynes, in which case you get three opinions". Another classic is the two fundamental laws of the discipline: the first one is that "for every economist, there exists an equal and opposite economist". The second is that "they're both wrong".

Pity, then, the poor Bank of England rate-setters who have to pick their way through a minefield of data, which has been broadly mixed in recent weeks, and plot a course for the economy. And give some credit, too, to the Bank's outgoing governor, Sir Mervyn King, who always insists the only thing he can ever say with certainty about Threadneedle Street's forecasts for inflation and growth is that they will be wrong. He would have sympathy with yet another wag, who claimed that economic forecasting "is like trying to drive a car blindfolded and following directions given by a person who is looking out of the back window".

The Bank's monetary policy committee faces a critical decision in 10 days' time over whether to expand its quantitative easing programme of money-printing beyond £375bn. The current £50bn round of purchases has expired and the economy – for all the headlines over 1 per cent growth in the July-September quarter – is still flat compared to a year ago. Judging by the evidence so far, this looks like being the tightest decision since June, when the committee split 5-4 in favour of no change. The hawkish faction on the Bank's Monetary Policy Committee – namely the chief economist Spencer Dale and the external members Martin Weale and Ben Broadbent - are urging caution. But on the other side of the fence, the pro-stimulus camp, led by David Miles, is likely to push the case for more stimulus. The ongoing impact of the Bank of England's bid to revive credit in the economy, its £80bn Funding for Lending scheme enabling banks to access cheap funding lines in return for growing lending – is the unknown quantity. We don't find out to what extent this has worked until the first week in December, two days before the Chancellor's autumn statement.

The difficulty of the Bank's task is that it is setting policy to meet a 2 per cent inflation target two years ahead. In some quarters, it looks reckless for the MPC to pump more funds into an economy which has just grown 1 per cent. Moreover, Consumer Price Index inflation is 2.2 per cent, a three-year low, but above the Bank's target. It is also set to rise again over the months ahead due to rising utility bills and food prices.

The trouble is that there are two sides to the coin: arguments and counter-arguments. Of the 1 per cent growth, 0.7 per cent is made up by a Jubilee bounceback and Olympic sales. Record employment, driven by part-timers and self-employment, is one thing, but the latest figures we have are, on the quarter to August, more than two months out of date. The big job losses from Ford last week immediately put a dampener on the growth figures. Moreover, the more up-to-date surveys, such as the CBI's sudden October collapse in exports and domestic orders for manufacturers, are far more worrying.

James Knightley, a senior economist at ING Bank, argues that the Bank has to look through the wash of historic data to concentrate on the bigger picture, of an economy broadly flat for the past two years. And the financial information firm Markit's latest round of purchasing manager surveys, which softened in September, could yet have a bearing on the Bank's decision. Mr Knightley – who backs more QE – says: "The GDP number is not a true reflection of what is going on. The economy is flip-flopping but sterling is strengthening – not good news for our exporters. And it's not exactly boom time for consumers. Whatever the Bank does, it is going to be berated by those on both sides of the debate." For Sir Mervyn and his MPC colleagues, it's an unenviable choice.

House prices

Green shoots

Although house prices are flat or declining in many parts of the UK the key London market is still powering ahead with 7 per cent growth year on year. Generally, growth in London house prices tends to eventually wash over the rest of the UK. In addition, mortgage finance, in such short supply in the recent past, has eased thanks in part to the Bank of England's Funding for Lending scheme. As a result, home loans – particularly in the fixed rate market are at historic lows.

Dying weeds

London prices may be booming but this is in large part due to an influx of foreign buyers. The tide of higher prices in central London is as yet showing few signs of trickling down to the rest of the UK. Transaction levels are barely half what they were during the boom. In fact, much of the north and west of the UK is still seeing house prices below the levels of 2007 and with little sign of recovery.

Eurozone

Green shoots

Recent weeks have seen a more positive news emerging from the eurozone. In particular, the European Central Bank’s unveiling of a potentially limited bond-buying scheme has eased nerves, and the Germans have come around to the idea of a eurozonewide banking union. This has seen borrowing costs for the governments of Spain and Italy reduce – taking a little pressure of the politicians.

Dying weeds

Many believe the eurozone is heading back into recession which is bad news for Britain. Even Germany, the zone’s most important economy, is spluttering. But it’s in the south that the real problems still lie. The Greeks still have to come to agreement with the Troika over the next round of austerity and in Spain unemployment tops 25 per cent and the banks need at least €60bn from bailout funds.

Inflation

Green shoots

One upside of recessions is that usually the rate of inflation falls and that is what has happened during the past year. The Consumer Price Index is now 2.2 per cent, very close to the Bank of England’s target of 2 per cent and well within the comfort zone. However, pay increases are still struggling to keep up with inflation, and those people who rely on interest from their savings are also finding times tough.

Dying weeds

Tell UK households that prices are easing and you may be greeted with hollow laughter. Energy companies seem to be running roughshod over consumers with massive hikes in prices as winter is approaching, while the cost of petrol remains stubbornly high. Meanwhile, global crop failures are also pushing up the cost of key foodstuffs. Meanwhile, pay freezes in much of the public and private sector are hurting household disposable incomes.

GDP & jobs

Green shoots

Better than expected third-quarter GDP gave a much needed lift to the beleaguered coalition and cheered business leaders. What’s more, it seems outside of construction – badly hit by government cuts – most parts of the economy are moving forward. This is highlighted by unemployment which continues to defy predictions by shrinking, even during the three quarters that the economy was in recession.

Dying weeds

First estimates of GDP growth tend to be flimsy and a downward revision of the 1 per cent figure is a possibility. And any gloss from the figures were well and truly taken off by car maker Ford axing 1,500 jobs on the same day. In fact, although unemployment has fallen over the summer this trend is showing signs of slowing and the winter could see a trickier time. No wonder the Bank of England Governor Mervyn King has warned the UK economy could "zig-zag" during 2013.

Confidence

Green shoots

Confidence is key to the economy, without it shoppers don’t spend and business doesn’t invest. Recent better news on growth, jobs and inflation does seem to be having a positive impact. The most recent consumer confidence poll suggests Britons are more optimistic about the economy than they have been for 15 months, with most believing their financial position will improve over the next year.

Dying weeds

Consumers may be cheerier but business isn’t feeling the love. The latest CBI surveys suggest manufacturers have just had their worst three months since late 2009, and construction orders continue to fall. This means a lot rests on retailers, with the Christmas run-up likely to dictate if the UK keeps moving out of recession.

Suggested Topics
Arts & Entertainment
Madonna in her music video for 'Like A Virgin'
music... and other misheard song lyrics
News
Waitrose will be bringing in more manned tills
newsOverheard in Waitrose: documenting the chatter in 'Britain's poshest supermarket'
News
The energy drink MosKa was banned for containing a heavy dose of the popular erectile dysfunction Levitra
news
News
Much of the colleges’ land is off-limits to locals in Cambridge, with tight security
educationAnd has the Cambridge I knew turned its back on me?
VIDEO
Sport
Australia's Dylan Tombides competes for the ball with Adal Matar of Kuwait during the AFC U-22 Championship Group C match in January
sportDylan Tombides was diagnosed with testicular cancer in 2011
News
Ida Beate Loken has been living at the foot of a mountain since May
newsNorwegian gives up home comforts for a cave
Extras
indybest10 best gardening gloves
News
Russia's President Vladimir Putin gives his annual televised question-and-answer session
peopleBizarre TV claim
Arts & Entertainment
tvIt might all be getting a bit much, but this is still the some of the finest TV ever made, says Grace Dent
Arts & Entertainment
Comedian Lenny Henry is calling for more regulation to support ethnic actors on TV
tvActor and comedian leads campaign against 'lack of diversity' in British television
News
Posted at the end of March, this tweeted photo was a week off the end of their Broadway shows
people
News
peopleStar to remain in hospital for up to 27 days to get over allergic reaction
Arts & Entertainment
The Honesty Policy is a group of anonymous Muslims who believe that the community needs a space to express itself without shame or judgement
music
News
Who makes you happy?
happy listSend your nominations now for the Independent on Sunday Happy List
Life & Style
life
Have you tried new the Independent Digital Edition iPad app?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

1st Line Helpdesk Engineer Apprentice

£150.00 per week: QA Apprenticeships: This company has been providing on site ...

Telesales & Sales Support Apprentice

£221.25 per week: QA Apprenticeships: This company is a well established Inter...

Client Relationship Manager - SQL, Python

£40000 - £50000 per annum: Harrington Starr: Client Relationship Manager - SQL...

**Financial Services Tax**

£35000 - £50000 per annum: Pro-Recruitment Group: Take your chance to join the...

Day In a Page

How I brokered a peace deal with Robert Mugabe: Roy Agyemang reveals the delicate diplomacy needed to get Zimbabwe’s President to sit down with the BBC

How I brokered a peace deal with Robert Mugabe

Roy Agyemang reveals the delicate diplomacy needed to get Zimbabwe’s President to sit down with the BBC
Video of British Muslims dancing to Pharrell Williams's hit Happy attacked as 'sinful'

British Muslims's Happy video attacked as 'sinful'

The four-minute clip by Honesty Policy has had more than 300,000 hits on YouTube
Church of England-raised Michael Williams describes the unexpected joys in learning about his family's Jewish faith

Michael Williams: Do as I do, not as I pray

Church of England-raised Williams describes the unexpected joys in learning about his family's Jewish faith
A History of the First World War in 100 moments: A visit to the Front Line by the Prime Minister's wife

A History of the First World War in 100 moments

A visit to the Front Line by the Prime Minister's wife
Comedian Jenny Collier: 'Sexism I experienced on stand-up circuit should be extinct'

Jenny Collier: 'Sexism on stand-up circuit should be extinct'

The comedian's appearance at a show on the eve of International Women's Day was cancelled because they had "too many women" on the bill
Cannes Film Festival: Ken Loach and Mike Leigh to fight it out for the Palme d'Or

Cannes Film Festival

Ken Loach and Mike Leigh to fight it out for the Palme d'Or
The concept album makes surprise top ten return with neolithic opus from Jethro Tull's Ian Anderson

The concept album makes surprise top ten return

Neolithic opus from Jethro Tull's Ian Anderson is unexpected success
Lichen is the surprise new ingredient on fine-dining menus, thanks to our love of Scandinavian and Indian cuisines

Lichen is surprise new ingredient on fine-dining menus

Emily Jupp discovers how it can give a unique, smoky flavour to our cooking
10 best baking books

10 best baking books

Planning a spot of baking this bank holiday weekend? From old favourites to new releases, here’s ten cookbooks for you
Jury still out on Manchester City boss Manuel Pellegrini

Jury still out on Pellegrini

Draw with Sunderland raises questions over Manchester City manager's ability to motivate and unify his players
Ben Stokes: 'Punching lockers isn't way forward'

Ben Stokes: 'Punching lockers isn't way forward'

The all-rounder has been hailed as future star after Ashes debut but incident in Caribbean added to doubts about discipline. Jon Culley meets a man looking to control his emotions
Mark Johnston: First £1 million jackpot spurs him on

Mark Johnston: First £1 million jackpot spurs him on

The most prize money ever at an All-Weather race day is up for grabs at Lingfield on Friday, and the record-breaking trainer tells Jon Freeman how times have changed
Ricky Gervais: 'People are waiting for me to fail. If you think it's awful, then just don't watch it'

Ricky Gervais: 'People are waiting for me to fail'

As the second series of his divisive sitcom 'Derek' hits screens, the comedian tells James Rampton why he'll never bow to the critics who habitually circle his work
Mad Men series 7, TV review: The suits are still sharp, but Don Draper has lost his edge

Mad Men returns for a final fling

The suits are still sharp, but Don Draper has lost his edge
Google finds a lift into space will never get off the ground as there is no material strong enough for a cable from Earth into orbit

Google finds a lift into space will never get off the ground

Technology giant’s scientists say there is no material strong enough for a cable from Earth into orbit