Surprise, surprise....good news about the economy!

by Ed Bowsher on 23 July 2010  |  10 comments
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George Osborne will be a happy man today. Economic growth is higher than expected. Maybe we won't have a double-dip recession after all.....

Last month's statistical update on the UK economy was impressive. The economy grew by 1.1% in the second quarter. Impressive.

So what does this mean for us all?

Interest rates

UK inflation is currently running at 3.2% - higher than the Bank of England’s 2% target. The normal way to fight inflation is to increase the base rate, but the Bank of England has so far held off from doing this on the grounds that the UK economy is still very fragile and it expects inflation to fall.

However, the economy now looks healthier than many people thought, so the chances of a rise in the base rate in the next six months have risen.

If you work in the public sector and you’re worried about losing your job, today’s news makes no change to the likelihood of you joining the dole queue. George Osborne will, if anything, feel more confident that the economy can cope with spending cuts, so he’ll be keen to continue with his austerity policy.

However, things look slightly better today if you work in the private sector. Economic growth is picking up and some businesses may decide that no more pruning is necessary.

Where do we go from here?

I’ve been saying for some time that I thought a double dip recession was likely. I’ve also disagreed with the view that inflation is the biggest threat facing the British economy.

I can’t deny that today’s news means a double dip is less likely, although not impossible. However, I still suspect that growth will be slow during 2011. For starters, growth will be held back as rates rise and fiscal austerity will make a difference too. On top of all that, our export markets in the US and Europe continue to look fragile.

As for inflation, the last few months have been rather odd. It’s not soared away as some pundits had feared. On the other hand, it’s persistently stayed above 3% even though prices have been rising much more slowly in the US and Europe. The worry is that the man and woman on the street have realised that inflation isn’t falling and will be pushing for higher wage rises over the next year.

What’s more, VAT is going to rise to 20% in January, so that will be another boost to inflation. However, I suspect that slow growth will mean that inflation won’t get out of hand.

I wrote some firm predictions for 2011 five minutes ago, but I’ve decided to be more prudent and just go with generalities. It’s hard to make firm predictions when today’s growth numbers could easily be revised downwards.

And you can’t completely rule out a second financial crisis. In which case, all bets are off....