The UK is definitely recovering but we simply don't know if it will last

Economic View: It is not only boring snoring to go around saying there is no recovery. It is plain wrong

Two questions. Is the UK recovery real? And is it sustainable? It has become pretty clear that the answer to the first is yes, though you need to acknowledge the uneven nature of economic performance between the different regions. But the answer to the second is more nuanced. If you focus on the demand side, we have a recovery led by consumption. If you look at the supply side it is one led largely by services. Both are fuelled by very easy money and that at some stage will have to be reversed, but for the time being you have to be very pessimistic not to admit that there is quite a lot of growth around.

There are two sorts of economic data. There is the macro-economic stuff, which obviously includes GDP and employment, and also the purchasing managers' indices (PMIs), which give the best forward-looking indicator for what is likely to happen in the next few months. This is all strongly positive. You can see in the left-hard graph what has happened to GDP, together with a growth indicator developed by the capital-markets team of Royal Bank of Canada, looking at these PMIs. That suggests growth in the third quarter, the one that has just ended, of 1.2 per cent or nearly 5 per cent expressed at an annual rate.

The other sort is the hard data – hard numbers of what has actually happened, things such as car sales and so on. These are also positive. Indeed, September car sales at 403,136 units were the highest for over five years, up by more than 12 per cent on the previous year. Another bit of hard data that is worth looking at is tax revenue. There are some distortions but one encouraging number here is that in the first five months of this financial year total tax revenues were up 8.4 per cent on the previous year. In August VAT revenues were running 4.4 per cent up, which is good news because VAT covers something like 40 per cent of the economy. If that 40 per cent has been doing all right the chances are that the other 60 per cent will have been doing OK too.

I find this pretty conclusive. It is not only boring snoring to go around saying there is no recovery. It is plain wrong.

The more interesting issue is about sustainability. The argument runs something like this: it is of course better to have a recovery than not have one, but in an ideal world growth would be sustained by a mixture of exports and higher incomes at home. We don't really have that.

Part of the problem is weakness in our main markets. The balance of payments dipped further into the red earlier this year. Physical exports to the eurozone, which, unfortunately, is still our largest market, were poor, and while service exports remain strong they are not yet big enough to cover the gap. We don't have to run a current-account surplus, but we are attracting foreign investment from overseas. However, the deficit ought not to be more than, say, 2 per cent of GDP, and it pushed up to 4 per cent.

Barring some further disaster in the eurozone, prospects are slightly brighter. The latest export data is a little better. The eurozone taken as a whole seems to be nudging back to growth. And the artificial depression of the pound earlier this year, when it was talked down by the previous Governor of the Bank of England, has reversed itself. This is helpful because while you need a competitive exchange rate, an excessively depressed one pushes up your import costs and cuts export revenues – neither of which we need.

So, slightly better export prospects; what about domestic demand?

There are two big puzzles. The first is how people manage to increase consumption – buy more cars for example – when incomes remain depressed. The obvious explanation, that people are running down savings, does not really work because savings are not bad. The savings figures are difficult to interpret but it is clear people are still paying off mortgages faster than they need to, rather than borrowing more against the value of their homes.

The best explanation is to say there are several factors at work, of which the most important is rising employment. We as individuals are not seeing much of an increase in our income, maybe the reverse. But there are more of us in work and therefore the total pool of money available to buy stuff is rising. Add in slightly easier access to credit, money spent by foreigners here, spending funded by wealth rather than income, money from the payment protection insurance settlements by the banks, and increased consumption is not so surprising. Sustainable? Probably yes, but expect any build-up to be gradual.

The other puzzle is what on earth is happening to productivity. Have a look at the right-hand graph. For the past 40 years productivity has risen steadily in good times and bad. Then suddenly in 2008 it stopped rising and started to fall back. So a trend that seemed utterly solid has completely broken down. There are all sorts of possible explanations of which my favourite is that we are finding it almost impossible to measure output in the service industries, which is probably higher now than we think. But whatever the explanation, this is crucial for the durability of the expansion.

It is very simple. If we can expand output rapidly to meet demand then this growth phase will be much more durable than if we start running into bottlenecks in the next year or two. The answer to that is we simply don't know – and we need to be humble about the limits of our knowledge.

Arts and Entertainment
Gregg Wallace in Summer's Supermarket Secrets
tv All of this year's 15 contestants have now been named
Arts and Entertainment
Inside the gallery at Frederick Bremer School in Walthamstow
tvSimon Usborne goes behind-the-scenes to watch the latest series
Life and Style
A picture taken on January 12, 2011 shows sex shops at the Paris district of Pigalle.
newsThe industry's trade body issued the moratorium on Friday
News
Winchester College Football (universally known as Winkies) is designed to make athletic skill all but irrelevant
Life...arcane public school games explained
PROMOTED VIDEO
Arts and Entertainment
Could we see Iain back in the Bake Off tent next week?
tv Contestant teased Newsnight viewers on potential reappearance
Life and Style
Silvia says of her famous creation: 'I never stopped wearing it. Because I like to wear things when they are off the radar'
fashionThe fashion house celebrated fifteen years of the punchy pouch with a weighty tome
News
i100(and it's got nothing to do with the Great British Bake Off)
News
Angelina Jolie with her father Jon Voight
peopleAsked whether he was upset not to be invited, he responded by saying he was busy with the Emmy Awards
News
Bill Kerr has died aged 92
peopleBill Kerr appeared in Hancock’s Half Hour and later worked alongside Spike Milligan and Peter Sellers
News
news It's not just the world that's a mess at the moment...
Sport
footballPremiership preview: All the talking points ahead of this weekend's matches
News
Keira Knightley poses topless for a special September The Photographer's issue of Interview Magazine, out now
people
News
ebooksAn evocation of the conflict through the eyes of those who lived through it
Voices
The Ukip leader has consistently refused to be drawn on where he would mount an attempt to secure a parliamentary seat
voicesNigel Farage: Those who predicted we would lose momentum heading into the 2015 election are going to have to think again
Arts and Entertainment
Cara Delevingne made her acting debut in Anna Karenina in 2012
film Cara Delevingne 'in talks' to star in Zoolander sequel
News
i100
Sport
Mario Balotelli pictured in his Liverpool shirt for the first time
football
Life and Style
tech
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

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

iJobs Job Widget
iJobs Money & Business

Data Scientist (SQL,Data mining, data modelling, PHD, AI)

£50000 - £80000 per annum + benefits+bonus+package: Harrington Starr: Data Sci...

SAS Business Analyst - Credit Risk - Retail Banking

£450 - £500 per day: Orgtel: SAS Business Analyst, London, Banking, Credit Ris...

Project Manager - Pensions

£32000 - £38000 Per Annum Bonus, Life Insurance + Other Benefits: Clearwater P...

KYC Analyst, Birmingham - £200-£250 p/d

£200 - £250 per day + competitive: Orgtel: KYC Analyst, Key Banking Client, Bi...

Day In a Page

Ukraine crisis: The phoney war is over as Russian troops and armour pour across the border

The phoney war is over

Russian troops and armour pour into Ukraine
Potatoes could be off the menu as crop pests threaten UK

Potatoes could be off the menu as crop pests threaten UK

The world’s entire food system is under attack - and Britain is most at risk, according to a new study
Gangnam smile: why the Chinese are flocking to South Korea to buy a new face

Gangnam smile: why the Chinese are flocking to South Korea to buy a new face

Seoul's plastic surgery industry is booming thanks to the popularity of the K-Pop look
From Mozart to Orson Welles: Creative geniuses who peaked too soon

Creative geniuses who peaked too soon

After the death of Sandy Wilson, 90, who wrote his only hit musical in his twenties, John Walsh wonders what it's like to peak too soon and go on to live a life more ordinary
Caught in the crossfire of a cyber Cold War

Caught in the crossfire of a cyber Cold War

Fears are mounting that Vladimir Putin has instructed hackers to target banks like JP Morgan
Salomé's feminine wiles have inspired writers, painters and musicians for 2,000 years

Salomé: A head for seduction

Salomé's feminine wiles have inspired writers, painters and musicians for 2,000 years. Now audiences can meet the Biblical femme fatale in two new stage and screen projects
From Bram Stoker to Stanley Kubrick, the British Library's latest exhibition celebrates all things Gothic

British Library celebrates all things Gothic

Forthcoming exhibition Terror and Wonder: The Gothic Imagination will be the UK's largest ever celebration of Gothic literature
The Hard Rock Café's owners are embroiled in a bitter legal dispute - but is the restaurant chain worth fighting for?

Is the Hard Rock Café worth fighting for?

The restaurant chain's owners are currently embroiled in a bitter legal dispute
Caribbean cuisine is becoming increasingly popular in the UK ... and there's more to it than jerk chicken at carnival

In search of Caribbean soul food

Caribbean cuisine is becoming increasingly popular in the UK ... and there's more to it than jerk chicken at carnival
11 best face powders

11 best face powders

Sweep away shiny skin with our pick of the best pressed and loose powder bases
England vs Norway: Roy Hodgson's hands tied by exploding top flight

Roy Hodgson's hands tied by exploding top flight

Lack of Englishmen at leading Premier League clubs leaves manager hamstrung
Angel Di Maria and Cristiano Ronaldo: A tale of two Manchester United No 7s

Di Maria and Ronaldo: A tale of two Manchester United No 7s

They both inherited the iconic shirt at Old Trafford, but the £59.7m new boy is joining a club in a very different state
Israel-Gaza conflict: No victory for Israel despite weeks of death and devastation

Robert Fisk: No victory for Israel despite weeks of devastation

Palestinians have won: they are still in Gaza, and Hamas is still there
Mary Beard writes character reference for Twitter troll who called her a 'slut'

Unlikely friends: Mary Beard and the troll who called her a ‘filthy old slut’

The Cambridge University classicist even wrote the student a character reference
America’s new apartheid: Prosperous white districts are choosing to break away from black cities and go it alone

America’s new apartheid

Prosperous white districts are choosing to break away from black cities and go it alone