The view is spectacular. I am currently on Scotland's west coast looking out at the Ailsa Craig. Weather can be rough here, but at the moment the sun is out, the water is clear, the wind is warm. Perhaps it's a good picture of what's going on in the U.K. economy these days. But like the weather in these parts, will the good times last, or are they likely to change...again?
Global crisis hit the U.K. economy hard -- for different reasons than in other OECD countries and key Continental economies. The fact that economic crisis was preceded by financial crisis was particularly concerning for an economy highly dependent on its financial sector. Not only was output in trouble, but reputation was also very much at risk. The bail-out of significant British financial institutions could have easily had wide-ranging repercussions well beyond the economic crisis itself.
The immediate effect was scathing. GDP fell swiftly in 2008, enough to clock a 0.8 per cent drop for the year and set up 2009 for a staggering 5.2 per cent tumble. That was enough to send the unemployment rate from an impressive low-5 per cent level up beyond 8 per cent in less than a year. It remained parked at that level as the economy struggled to achieve meager growth in the following four years.
Things are now picking up -- significantly. Economy-wide growth has exceeded the three per cent level in three of the past four quarters, and after clocking 1.7 per cent growth last year, the U.K. is looking at a '3 percenter' in 2014. Setting the stage for the best year since 2007 is strong consumer spending, robust business investment and a surge of service-sector exports.
Rising activity is captured in key indicators. The Purchasing Managers Index is in very strong territory across industry groupings, and compares very favourably with pre-crisis levels. The housing market is heating up, both in prices and activity. The composite leading indicator is still looking strong. But perhaps the most dramatic indication of change is confidence. Clear across its regions, the U.K. is witnessing soaring confidence that has taken the benchmarks back up to pre-crisis levels.
Considering how frenzied things were at that time, recent movement is quite gripping, to say the least.
Current momentum raises a critical issue. Given the years in the doldrums, it's quite likely that even with the recent rebound in confidence, the economy could be caught unawares in terms of its capacity. Firms have been investing at sub-par levels for years now, but are facing tight capacity limits and rising orders. Labour is getting more scarce. The unemployment rate has tumbled below 7 per cent in the past year, surprising almost all market-watchers. Unemployment claimants have plunged to 3.3 per cent of the work force. Given that jobs are a lagging indicator of the economy, there is likely more labour force tightening on the way -- a new problem for the economy to deal with.
Suddenly, all eyes are on the Bank of England. The era of ultra-loose monetary policy is coming into question, as the U.K. economy rapidly ramps up again. The job market crashed through the forward guidance marker, creating expectations that the central bank would go into tightening mode. It is resisting, but there are growing worries of overheating, given the amount of time interest rate movements need to see the needed impact on the real economy. It's a good position to be in after all the global talk of disinflation and deflation -- but with the ample liquidity that currently exists, it is critical to get this one right.
A key lesson for the world is how quickly an economy can go from downside to upside worries. There is no doubt great relief that finally we are talking about the latter -- but the duration of the easy-money period may make its end a bit tougher to come to grips with than in the past. And it seems that on this score, the U.K. economy is out front, a bellwether for the rest of us.
The bottom line? Growth is up, and it's looking like inflation is hard on its heels. The U.K. is charting this new course; we'd all do well to watch with interest, and to wish them well.