Britain’s Seven Years of Famine End as Recovery Powers OnEmma Charlton and Jennifer Ryan
Britain’s years of famine may be over.
The economy probably grew for a sixth consecutive quarter in the three months through June, returning gross domestic product to levels last seen before the financial crisis. Output this year is on course to surpass its 2007 peak, ending an era that Bank of England officials used to describe in biblical terms as “seven lean years” following “seven years of plenty.”
Britain’s revival may provide a fillip to Prime Minister David Cameron as he seeks re-election next year, and heap pressure on BOE Governor Mark Carney to begin removing emergency stimulus. While policy makers have resisted lifting interest rates from a record low, there’s a 40 percent chance one of them voted for an increase this month, according to BNP Paribas SA.
“The story continues of a pretty consistent and fast rate of growth,” said David Tinsley, a former BOE official who’s now an economist at BNP Paribas in London. “Policy makers will need to think about tightening. We’re getting close to the point where the first MPC member votes for a hike.”
Carney, who will speak in Scotland on Wednesday, has whipsawed investors over the last six weeks with contrasting communications on the timing of policy tightening.
On July 15, he said officials are only giving guidance on the path of rates, not the timing of the first increase, and insisted he will be “guided by the data.” A slew of reports this week including retail sales, government borrowing and house prices will help illustrate the recovery’s progression.
GDP expanded 0.8 percent in the second quarter, matching the first quarter’s growth, according to the median estimate of 36 economists in a Bloomberg survey. On an annual basis, the economy grew 3.1 percent, the most since the final three months of 2007, a separate poll predicted before the release on July 25.
That will push GDP past its pre-recession peak in the first quarter of 2008. Former Bank of England Governor Mervyn King in June 2011 predicted “seven lean years” for the world economy. Former Deputy Governor Charlie Bean also used the language from the Bible’s Old Testament in a speech this year.
“My first seven years were years of plenty,” he said, referring to his time at the BOE from 2000-2014. “But the second seven years were years of famine, as the Great Moderation turned into a Great Tribulation.”
While that metaphor might imply Britain is due a return to years of bounty, it’s only the last of the Group of Seven nations, excluding Italy, to regain its pre-recession level. The U.K.’s difficulty in doing so was exacerbated by the lost ground to make up: the peak-to-trough drop in GDP that began in 2008 totaled 7.2 percent, the biggest slump since World War II.
Carney and his officials have chided investors for failing to appreciate risks to the recovery, including geopolitical tensions as well as threats from elevated debt levels and a surge in property prices. The European Central Bank is pumping stimulus into the euro area, Britain’s biggest trading partner, and while the Federal Reserve has started to scale back asset purchases, it is still buying $35 billion of bonds a month.
The EY ITEM Club said today that sluggish wage growth and inflation below the 2 percent target will prompt policy makers to keep their key rate on hold until the first quarter of next year.
“The latest batch of data haven’t been outstanding but we’re looking for a bounce back in June,” said Stuart Green, an economist at Santander SA in London, who predicts rates will rise in November. “For the BOE, it’s all about how the labor market is progressing. They have to acknowledge at some point that spare capacity is being used up more quickly than they anticipated and that has consequences for monetary policy.”
Officials will lift the key rate by 25 basis points in February, three months before the general election due on May 7, futures contracts predict. The pound strengthened almost 12 percent against the dollar in the past year as investors bet on the prospect of higher borrowing costs. Sterling was little changed at $1.7073 at 2:03 p.m. London time.
The recovery has yet to drive Cameron’s Conservatives, the biggest partner of the coalition government, above the opposition Labour Party in voter opinion polls. A July 16 YouGov Plc survey put the Tories at 33 percent, down 1 point, while Labour rose 3 points to 36 percent. The Liberal Democrats, the other coalition party, rose 3 points to 9 percent.
Cameron changed his cabinet last week, removing unpopular ministers to regroup before the election. That vote, along with the Scottish referendum on independence in September, is creating political uncertainty that may steer investors away from Britain despite the recovery in growth and jobs.
This week’s GDP report may still offer the Conservatives a boost that’s eluded them until now.
“Reaching the pre-crisis peak is politically important because the government can now say the economy is bigger than it was in 2007,” said Rob Wood, an economist at Berenberg Bank in London and a former BOE official. “Economically this makes no difference. What it does mean is that we’ve had seven lost years, which is absolutely nothing to congratulate ourselves on.”