Is the UK economy really in recovery?

The coalition has enjoyed what appears to be a raft of positive economic data – but the UK’s small businesses aren’t buying it.

A new survey from Regus found that just 14 per cent of the UK’s small businesses believe that the recovery is in full swing, despite assurances from David Cameron that the economy is “turning a corner”.

Economic data can be convoluted, and its impact on the UK’s small businesses can be confusing. So is the UK really in recovery?

Is the recession over?

The UK is no longer in recession. The economy grew by 0.8 per cent during the third quarter of the year, and by 0.7 per cent in the three preceding months. This represents the fastest rate of economic growth since 2010.

This all sounds like good news. But this remains a period of downturn as concerted as any since the 1920s. The UK’s GDP is still 2.5 per cent below its pre-recession peak, nearly 70 months since that recession began. In contrast, by this point following the 1990-1993 downturn, GDP was up by nearly 14 per cent. Clearly, this is not a conventional recovery, if it is a recovery at all.

What is happening to employment?

The unemployment rate is now 7.7 per cent, having fallen by just 0.1 per cent in the three months to August. In some areas of the country the problem is even worse; in Birmingham Ladywood 11.4 per cent of the population is out of work. Nationally, the number out of work is only slightly lower than during its November 2011 peak, when 2.68 million people were unemployed.

But even those in work are feeling a dramatic squeeze. Mervyn King, then the Governor of the Bank of England, warned in 2011 that Britons face the most prolonged and dramatic fall in living standards for 90 years; other commentators suggest that the UK has suffered the worst squeeze since the 1870s. Coupled with rising inflation (the real rate of which many economists suggest is far higher than the official RPI of 3.2 per cent), one would expect this to have had a knock-on impact on consumer spending. In reality, though, this measure rose by 0.3 per cent during the second quarter. While this might appear to be positive, many commentators are worried that this is a sign that the consumer recovery is being led by an unsustainable debt boom as Britons make use of easier access to credit in order to offset below inflation pay deals.

How are the key sectors faring?

The service sector remains the UK’s primary economic driver. In September the Purchasing Managers’ Index (PMI) recorded a reading of 60.3, where 50 is equivalent to no change. This is just shy of the previous month’s 60.5, which represented the highest level of growth since 2007.

Manufacturing, meanwhile, hit 56 on the PMI scale in October, down from 56.3 in September. In August it reached 57.1, the highest level since 2011. This growth has been driven in great part by exports. Construction, which was calamitously affected by the downturn, reached in August its highest level for nearly six years.

What about business lending?

Lending remains a primary concern for the UK’s businesses. The banks maintain that they are willing to lend, but many small firms have been put off applying because of a sense that they will be turned down out of hand. The Bank of England’s latest Trends In Lending report found that lending to UK businesses contracted again in the three months to August, the twelve-month average of lending to firms having shrunk by 3.8 per cent in the third quarter. Bank lending has now fallen for five consecutive years.

This has been partly offset, though, by a growth in non-bank lending. Asset-based finance, for example, grew by 10 per cent in the 12 months to June, representing £17.4 billion worth of credit.

The government’s flagship Funding For Lending scheme has failed. Despite the much-vaunted programme, lending to UK businesses contracted in the year following its launch. The government is therefore under increasing pressure to take further action to restore lending, particularly to SMEs.

How about confidence?

While this year has seen an uptick in consumer confidence, this crucial measure was down in October for the first time in six months. However, market research group GfK found that confidence remains significantly higher than this time last year – although consumers remain cautious about the general economic outlook.

Meanwhile the UK’s small businesses are feeling more optimistic, the FSB having reported that confidence is more than double its level during the second quarter of 2012. The business group also found that firms are happier about hiring in the immediate future.

Could there be another downturn?

Many economists are concerned about the growth of what seems to be a housing bubble. Houses in London now appreciate in value every day by more than the average Londoner earns. Clearly this trajectory is unsustainable.

A second housing crash could have calamitous effects on the UK economy; effects that some commentators believe could be far worse than those seen in 2008. Furthermore, many are worried that a debt-led recovery is also unsustainable, particularly when wages are being consistently cut in real terms. As discussed earlier, this downturn is the longest since the 1920s, and many economists see no immediate way out.