GDP up 0.6%: Momentum is growing, but UK still lags behind in economic recovery

Coalition ministers hail signs of ‘healing’, but total output is still below its 2008 peak, as US and Germany power ahead

The British economy picked up momentum in the second quarter of the year, but the latest official figures also showed that the road to a full recovery remains a very long one.

The Office for National Statistics (ONS) reported today that gross domestic product expanded by 0.6 per cent in the three months to June. That was double the pace of the first three months of the year. Coalition ministers hailed the pick-up as confirmation of their view that the UK economy is finally “healing”.

However, the ONS also reported that the total level of economic output is still 3.3 per cent below its peak in early 2008, just before the recession began. Other advanced economies such as the United States and Germany long since recovered the ground they lost in the global downturn.

And due to population growth over the past five years the level of economic activity per person in the UK has barely improved since the financial crisis. Britain GDP per capita remains around 7 per cent below its peak in 2007.

The shadow Chancellor, Ed Balls, said that the growth in the latest quarter was “welcome and long overdue” – but added that “families on middle and low incomes are still not seeing any recovery in their living standards”. Wages are still shrinking as inflation outstrips pay growth.

The ONS said that all of the major sectors of the economy grew over the three months from April to June. Construction was up 0.9 per cent on the first quarter and industrial production increased by 0.6 per cent. But the greatest contribution to growth came from the services sector, accounting for more than three-quarters of the economy, which also expanded by 0.6 per cent.

The expansion was in line with expectations but was still welcomed. Chris Williamson of Markit said: “Prospects look good for a continuation of the recovery in the third quarter, with consumers and businesses both helping drive the upturn.”

The Chancellor, George Osborne, also hailed the figures, which were better than the 0.2 per cent projected by his official forecaster, the Office for Budget Responsibility. “Britain is holding its nerve, we are sticking to our plan, and the British economy is on the mend,” he said.

The Chief Secretary to the Treasury, Danny Alexander, said the figures were “encouraging”, but added: “We shouldn’t get over-excited, because this country has got a long way to go – not just to clear the financial mess that we inherited from the previous government, but to rebuild our competitiveness and to make sure that we do have the conditions in this country for businesses to thrive.”

The second quarter of higher-than -projected growth means that the Office for Budget Responsibility is now certain to revise up its 0.6 per cent forecast for GDP growth in 2013, made at the time of the Budget in March.

Some analysts warned that the recovery will continue to face headwinds if wages continue to fall after accounting for inflation and as ambitious government spending cuts continue to bite over the next five years.

“With households’ real pay still falling, bank lending flat and public sector austerity measures building, the economy may struggle to maintain its recent rate of growth in the second half of this year,” said Vicky Redwood of Capital Economics.

GDP is now 1.4 per cent higher than it was a year earlier, although the same quarter of 2012 contained an extra bank holiday. The ONS’s first estimate is based on just 44 per cent of the data.

Bouncing back: Which sectors are leading the way?

Services

The services sector, which spans everything from hotels to haircuts, has performed better than the rest of the economy in recent years, but that is not saying very much. Output is still fractionally down on the level achieved in the first three months of 2008. The sector expanded by 0.5 per cent in the first three months of the year, followed by 0.6 per cent in the most recent quarter.

Construction

The building sector, which accounts for 6 per cent of the economy, has been on a roller-coaster ride since the global downturn. Output collapsed by almost 20 per cent in 2008-09 as the demand for new construction projects froze. There was a partial recovery of that lost ground over 2010, but activity collapsed again in 2011. Output grew by 0.9 per cent in the most recent quarter, but levels are 16 per cent below the peak five years ago.

Manufacturing

Manufacturers account for around 10 per cent of the economy, but George Osborne looked for them to power growth in 2010, declaring his confidence that there would be a “march of the makers” and a surge in exports. It hasn’t materialised. Over the past three years, manufacturing output has been in decline. Growth turned up in the last quarter by 0.4 per cent, but output remains 10 per cent below its 2008 peak.

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