Before we judge the worth of the marginal growth in the economy in the second quarter we must consider two factors. Before the crash a good deal of economic activity was heavily leveraged and driven by debt; therefore in part it did not truly exist, any more than wealth devalued by massive debts. It is also the case that the government has been engaged in a programme to shrink itself. This means that the overall figure represents much higher growth for the private sector, indicating that to some extent at least the economy is rebalancing. Moreover it is doing this without resorting to borrowing at anything like the levels in the run up to the crash.
Clearly the recovery from a debt binge, both public and private, without yet more borrowing, but by investment and efficiency is initially very slow. It was also necessary to move from a service driven economy to one in which manufacturing plays a much bigger role and to do that exports have to expand. A marginally lower pound will help. So will the stagnated condition of Euro-land as this will encourage business to seek new markets in the growing economies of Asia and South America. The government often cautions undue optimism, citing difficulties in Europe as a hazard to growth of exports.
In fact the greatest threat to the continuing improvement comes not from Europe but the government itself, in the form of its failure to recognise the catastrophic part played in the crash by a housing market based on low house building and rising values of existing stock, to the point where the excessive cost of housing is not only distorting the whole economy, but acting as a brake upon it. There is no excuse for this, not least because the government has to foot such a huge bill to subsidise excessive rents and should therefore be able to link the sums to the problem.
It is significant that almost every single responsible financial commentator criticises as near reckless the initiative to guarantee excessive mortgages; the whole idea of the house price correction was to bring the cost within prudent limits, with a greater stake of equity saved up before purchase, and to intervene to distort this process with guarantees allowing a return to 95% mortgages, has been described by the CBI as mad. It is worse than that. It is wanton financial irresponsibility which guarantees another crisis further down the track. Vince Cable, the Chancellor’s credible rival in the coalition cabinet, has taken to the media to express anxiety.
Of course in the short term the guarantee will provide a boost both to construction and to house sales, with a knock on effect in the High Street. But, just as before, it will all go wrong. Of course it will take time for that to happen. Meanwhile it will probably look as if things are really good about spring of 2015.
Eureka!