British economy celebrates year of return to growth

The British economy has surprised this year with a remarkable turnaround in fortunes, driven by greater confidence and increased household spending, but economists are posing the question -- is the recovery sustainable? The end of 2012 saw the UK economy perched on a grim precipice, facing the prospect of a recession for the third such time since the onset of the financial crisis at the end of 2008. Yet, 2013 did not see not a morale-sapping dip into recession followed by another anaemic recovery. Instead UK growth moved up several gears quarter-on-quarter. British finance minister George Osborne forecast growth of 0.6 percent in his March budget, but had revised that up to 1.4 percent in his autumn mini-budget. Simon Wells, chief UK economist at HSBC Global Research, said that the central event in the economy had been the "unexpectedly swift turnaround in economic growth." "Credit conditions have finally started to thaw as the effects of past policies have started to trickle through into the economy," said Wells. In an interview with Xinhua, Wells stated, "But most important there has been a drop in the level of uncertainty about the economy and that has boosted consumer confidence and has led to recovery in the housing market." "It really was as if this cloud of uncertainty lifted very rapidly in the first half of the year and caused a much bigger turnaround than anybody would have expected," he added. Inflation has surprised many, with a fall from near 3 percent in the summer to 2.1 percent now, driven by stronger sterling, a fall in oil prices and a smaller rise in education costs. NEW BANK GOVERNOR, POLICIES The UK central bank, the Bank of England (BOE), appointed a new governor at the beginning of July with former Bank of Canada Governor Mark Carney replacing Mervyn King. Carney moved quickly to implement a forward guidance policy, which was unveiled in August, putting the BOE in the same club as other central banks worldwide -- notably the U.S. Fed and the European Central Bank -- which have adopted the policy as a means of informing, reassuring, and thus stimulating economies. Carney targets 7 percent unemployment as a threshold to consider raising the current bank rate from its current historic low of 0.5 percent, where it has been since March 2009. He told a parliament economics committee earlier this month that "inflation has fallen back to within a hair's breadth of the 2 percent target and the recovery has finally taken hold." The strength of the recovery in the United Kingdom has consistently surprised on the upside and by more than in either the United States or the euro area, which is Britain's principal export market. However, Carney warned a return to growth was not yet a return to normality. "Nearly one million more people are out of work than in the years before the financial crisis, and the economy remains 2.5 percent smaller than it was in 2008." Unite general secretary Len McCluskey said falling unemployment was a welcome relief to many, but added the underlying trends pointed to a growing part-time, low wage economy "where the recovery is passing ordinary people by." Carney said that the recovery had some way to run before it would be appropriate to "consider adjusting the exceptional level of monetary stimulus that we continue to provide to the economy." He indicated forward guidance would remain in place as well as low bank rates, with the possibility of further quantitative easing if the situation were serious enough. Thanks to forward guidance, shorter-term interest rate expectations have not reacted as strongly as they have in the past, Carney said. However, Wells said much of the seeds of recovery had been sown by the time Carney assumed his new role. "Forward guidance has loosened policy further without doing any more quantitative easing," said Wells. "In practice what it has done is, to a small extent, persuade businesses and financial markets that despite the strong recovery we are seeing, interest rates aren't going to tighten or rise as quickly as they would have done in the past," he added.