Is the UK's economic 'recovery' really sustainable?

Last week the IMF announced that it expected the UK economy to grow by 3.2 per cent this year

This is one of the strongest growth rates of any major economy, and represents a hike in the IMF’s predictions. The group also expects to see UK GDP expand by 2.7 per cent in 2015.

The announcement was welcomed by ministers, who said it was proof that the government was on track. Chancellor George Osborne said: “Today the IMF has upgraded their 2014 forecast for the UK by more than any other major economy. The government’s long-term economic plan is working. But the job is not yet done, and so we will go on making the assessment of what needs to be done to secure a brighter economic future.”

So why are people still worried?

But not everyone is over the moon with the growth figures – and even people in government have reservations. This week business secretary Vince Cable argued that despite the GDP figures, wage growth remained sluggish. He pointed out that pay had risen by just 0.1 per cent in the south-west over the last year, and by 0.5 per cent in Yorkshire and the Humber – well below the headline rate of consumer inflation, which rose to 1.9 per cent in June.

Wage growth has long been a bone of contention for the government, and remains a key political battleground. According to shadow chancellor Ed Balls, by 2015 real wages will have suffered the biggest drop in any Parliament since Victorian times. Wages will be lower, Mr Balls said, by the end of this Parliament than they were at the start – the first time this has happened since the 1920s.

Meanwhile others are worried about the distribution of gains made in the UK economy. Much of the apparent recovery has been concentrated in London, which accounts for almost a quarter of the UK’s total economic output. Indeed, there is also concern that the London-centric nature of the uptick is symptomatic of its lack of sustainability. Others are concerned that the recovery has been driven, yet again, by the beginnings of another dangerous financial bubble.

What’s going to happen in the future?

The UK’s medium-term economic future remains unclear. While the government maintains that the IMF’s figures are proof that it should “stay the course”, others suggest that the recovery is not what it seems. The government’s controversial austerity programme is, despite appearances, still in its infancy. The majority of the cuts are still to come, and many are concerned that these could drive unemployment back up while putting further downward pressure on wages.

Meanwhile interest rate rises represent a potentially bleak promise. Earlier this month a key Bank of England official indicated that rates could rise sooner than expected, and there is widespread concern about the impact this will have on household and business debt. While some consumers have been able to pay down debt while rates have been low, many remain in a straightened financial state. Total credit card debt in the UK is close to £60 billion, and the Bank of England has publicly voiced its concern about many consumers’ ability to make their repayments when rates eventually rise.

For many commentators, then, the current period represents the calm before another storm. In these circumstances, businesses need to be prepared for every eventuality.