What's more, of that one per cent rise, the ONS estimates that 0.2 percentage points came from its booking of sales of Olympic tickets, many of which had occurred months earlier. 0.36 percentage points came from a rise in the output of government services. And a large chunk of the rest came simply because output bounced back after being depressed by the extra bank holiday in June. There’s not much evidence here of a strong, sustainable rise in private sector output.
And not should there be, because there are many reasons to be pessimistic about our prospects for recovery:
1. Our export markets are weak. Purchasing managers' surveys this week showed that the recession in the euro area is longer and deeper than feared. And it's possible that US demand will falter - or worse - as companies worry that the economy might fall off the fiscal cliff.
2. Companies might continue to rein in their capital spending plans. For one thing, most have more than enough capacity to meet demand; this week's CBI survey found 57 per cent of manufacturers working below capacity. Also, uncertainty about demand is crimping investment, as is the longstanding dearth of profitable opportunities. It’s no wonder that the CBI found that more firms plan to cut investment in plant and machinery over the next 12 months than raise it.
3. The prospects for a big rise in consumer spending are not great. Household incomes will be squeezed by higher utility bills and food prices. And it’s possible that employment growth will slow down, or worse, as recent labour hoarding is reversed: if this doesn’t happen, productivity will barely grow, which implies weak growth in either real wages or real profits, which is hardly conducive to a strong recovery.
4. There's more fiscal austerity to come. The OBR estimates that cyclically-adjusted net borrowing will fall from four per cent of GDP this year to 0.7 per cent in 2016-17 – a tightening of 3.3 percentage points. It also expects public sector current spending to fall 3.4 per cent in real terms between this year and 2016-17, whereas it has actually risen in the last two years.
5. There's a limit to how much monetary policy can support the economy. As Sir Mervyn King said this week, demand is weak in part because companies and households have been forced to reduce their expectations of how wealthy they'll be in future. And, he said, "Policy can only smooth, not prevent, the ultimate adjustment."
In saying all this, I'm not predicting a "triple dip" recession - though we shouldn't rule this out. I'm just saying that there are strong headwinds acting against the UK economy. The consensus amongst forecasts is for growth of just 1.1 per cent next year and 1.9 per cent in 2014. If they're even roughly right, this implies that it won't be until 2014 that GDP returns to its 2007 level. Bank of England data suggest that such a decline would be unprecedented except for the transitions to peacetime after the two world wars; even in the "Great Depression", GDP returned to its 1929 level by 1934.
This matters for investors for a simple reason. Low growth in GDP should mean low real returns on investment assets generally.
