Britain’s economy exceeded expectations in 2013, and new official figures suggest it may have grown by 2%. The momentum going into 2014 suggests it can do even better this year. Despite this, interest rates are unlikely to rise. Government borrowing will remain large by historical standards but should fall further.
This is a time for taking stock, for looking back and looking forward. And, for once, we can look forward with a degree of optimism. David Cameron says Britain can be the ‘flagship’ success story in 2014, an economy that has emerged healthier from the ashes of the financial crisis.
I don’t know about that, but we can perhaps forgive him a little hyperbole. His New Year message would have been a lot more difficult if the economy had not sprung into life during 2013. In fact, it would have been hard for him to claim that the government’s plan was working, without inviting ridicule.
As it is, we now know that 2013 was a lot better than expected and, indeed, a lot better than it seemed even a few weeks ago. On 20 December, the Office for National Statistics released revised figures for gross domestic product. They confirmed that the economy gathered strength through the year and that the ‘triple-dip’ feared a year ago was not remotely close.
More importantly, they pointed to a growth rate for 2013 of 1.8% or 1.9% (in time, it will surely be more than 2%), compared with the 1.4% estimated by the Office for Budget Responsibility (OBR) as recently as early December. Combined with good employment figures, falling unemployment (of which more below) and robust survey evidence, the economy ended the year on a strong note, which even the grim Christmas and New Year weather could not dampen.
Let me deal with three aspects of the outlook: growth, interest rates and the fiscal picture, starting with growth. Was 2013 a flash in the pan? I do not think so. A year ago, the economy had clearly lost momentum in the final weeks of 2012, hence those triple-dip fears (to remind you, the earlier double-dip has now been revised away).
This time it has been different. The surveys, in particular, point to considerable growth momentum as we begin the year in all the main sectors of the economy: services, manufacturing and construction. A good start to the year is important.
It means that stronger growth is likely. When we get figures for fourth quarter gross domestic product on 28 January, they are likely to show an increase on a year earlier of close to 3%. That means growth of 2.5% to 3% – not much different from a normal recovery – is perfectly possible for 2014. This, of course, would be the best since 2007, before the crisis hit home.
What will stronger growth mean for interest rates? As readers will know, the unemployment rate has become a pivotal measure. Mark Carney, the Bank of England governor, set out a form of so-called forward guidance shortly after his appointment last summer. That guidance was that a rate rise would not be contemplated by the Bank of England’s monetary policy committee (MPC) until the unemployment rate dropped to 7%. At the time, last August, the Bank did not expect that to happen until 2016.
Time has moved on. Those strong employment figures referred to earlier, including an increase of a quarter of a million jobs in the last three months, had the effect of pushing the unemployment rate down to 7.4%, with further falls expected. Some economists think 7% unemployment could be reached in the first three months of this year, while most think it will be hit before mid-year. There is an alternative: a sudden rise in productivity would mean slower growth in jobs and a more gradual unemployment fall. But, while I do expect an improved productivity performance, the unemployment momentum is firmly down.
So will we see a rate rise – the first since 2007 – by the middle of the year? There will certainly be plenty of speculation to that effect but I think not. In fact, I think there will be no change in official interest rates this year.
That will be disappointing to some, and regarded as risky by others, particularly with the housing market heating up. But Carney has made clear that he will use other measures to cool any irrational exuberance in housing and that will be a job for the financial policy committee, not the MPC. Maybe it would confuse the forward guidance message, but perhaps he should also be gently preparing the ground for eventual rate hikes, perhaps as soon as 2015.
Finally, what will be the impact of stronger growth on the public finances? Amid the good run of news in recent weeks, one disappointment came with the official figures for public borrowing, which showed a rise compared with a year earlier. The OBR’s December prediction of a £111bn deficit for 2013/14 (after £115bn in 2012/13) no longer looked so conservative.
There are, however, two potentially comforting points to make. One is that the final few months of the fiscal year can change the picture significantly; last year, a feared borrowing overshoot turned into a significant undershoot.
The second is that stronger growth tends to affect the public finances with a lag, so much of that effect has yet to come. We may not get the borrowing figure of less than £100bn I have been hoping for, though it should come in below the OBR’s £111bn figure.
So strong growth, continued low interest rates and a further gradual reduction in the budget deficit. What could possibly go wrong? The threat of trouble from the eurozone, or other parts of the world, has not gone away. The Federal Reserve, America’s central bank, will be reducing the size of its monetary stimulus in coming months. When it threatened to do that last year, the effect was to raise long-term borrowing costs.
The good news, however, is that we appear to be moving beyond the crisis, if not beyond all its effects. Things are getting better, which is a good way to start the year.
