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Three reasons the economy is a lot better than they say

Kathleen Brooks, head of research

Has the UK economy turned a corner?  Not according to the Organisation for Economic Cooperation and Development (OECD). It slashed the UK’s growth forecast for 2012 from +0.5% to -0.7%.

It also cut the eurozone’s growth forecast, but the UK is still seen to be lagging well behind Germany and the US according to the international economic organisation, which leaves us, yet again, at the back of the race for economic gold.

But why is everyone being so downbeat on the UK economy when the latest indicators for growth have actually bucked the overall trend in the eurozone, China and the US and picked up strongly over the summer?

The PMI surveys on manufacturing and services, which are released monthly and ask businesses about everything from the level of new orders they have received to the number of people they have laid/ off or employed over the month, recovered strongly in August.

The survey on manufacturing rose to its highest level since April, while the service sector rose to its highest level since March.

Of course one month’s worth of data does not suggest the UK economy is firing on all cylinders. We know the construction sector is still in the doldrums, however that is approximately 10% of economic growth, the strong reading in the services sector, which is equivalent to 70% of the UK economy, is much more encouraging.

So economic data releases since the start of this month are a chink of light in an otherwise gloomy economic outlook. So what has caused the clouds to clear and is the forecast about to get brighter?

Why August was good

There are at least three things that contributed to the boost to the economy in August. The first is the rebound after the Jubilee bank holiday-induced slowdown in the second quarter.

We can all give ourselves a pat on the back for going back to work without the distraction of multiple bank holiday weekends and concerts in Hyde Park, pageants on the Thames etc. When we all work 5-day week’s it’s surprising how much we can get done!

Another factor is the Olympics. All of those visitors to London spent money on food, accommodation, taxi fares, train fares and of course tickets.

That all feeds into the stronger August data, especially in the service sector. But what about when the Olympics and Paralympics end? Although we won’t be fighting the same intensity of crowds at London Bridge or Westfield in Stratford for very much longer there could be a post-Olympic boost to the UK economy.

The London Olympics and Paralympics have been called a triumph, so the Government must be hoping that it has had a long-term impact on our confidence, and when confidence is high it can cause consumers to keep on spending.

[Related link: What impact does the weather actually have?]

Is it enough?

We can’t expect past Bank holidays or sporting events to drag us out of this recession on their own. But there are a couple of things that could help the economy to regain some strength in the short -term.

The first is the employment picture. Businesses have continued to hire throughout the double dip recession. In the second quarter this year the number of people with a job increased by 201,000, which is the largest quarterly increase in two years.

If you have a job then you can spend money, which could help other parts of the economy and provide employment elsewhere.

Although the anomaly between the actual growth rate and the improvement in the labour market has left some economists baffled, make hay when the sun shines, I say. If those people feel confident enough to spend money then the “strong” labour market could prop up the economy for the rest of the year.

The other reason is the government. George Osborne may have been booed at the Paralympics earlier this month as the crowd made their feelings about fiscal austerity clear, however the real economic data doesn’t suggest Whitehall is cutting its budgets fast enough to meet the Government’s targets for fiscal consolidation.

Government spending has only fallen once in the last six quarters. If the Government does change course over the next few months and loosens its fiscal targets (even at the risk of losing the UK’s triple A credit rating) then we could see even more Government support for economic growth.

So, while there is no denying that the UK economy has been through the wars, things might not be as bad as we originally thought.

Rather than write about economic gloom it’s nice to see the UK economy surprise its critics every once in a while.

The OECD could be a bit hasty revising down its growth forecast for this year. We don’t believe the economy will be stellar in 2012, but it could pick itself out of the gutter it found itself in during the second quarter.

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