The U.K.’s economy hasn’t just recovered, it’s expanding

The United Kingdom’s economy has finally passed its pre-2008 financial crisis peak and is set to achieve the strongest annual gross domestic product growth rate among the G7 economies in 2014, echoing earlier predictions from the International Monetary Fund. Growth will be driven by companies investing heavily in their businesses as the ­economy moves “from recovery to expansion”.

The country’s gross domestic product dropped more than 7% from a high of £392bn to less than £365bn in early 2009, and it has struggled to reach that level ever since. But estimates due on Friday from the Office for National Statistics are predicted to show that in the second quarter of 2014 it expanded beyond the pre-crisis peak, rising to just more than £393bn.

Peter Spencer, chief economic adviser to the EY ITEM Club, said: “Confidence has ­returned and economic uncertainty has dropped well down the worry list. Business investment is being ramped up and helping to rebalance the economy away from consumption.” He added that the economy has “hit the sweet spot” with confidence in future demand driving investment.

Ahead of the figures from the ONS, the EY Item Club said GDP will rise by 3.1pc over 2014, more than any other G7 nation. “Output has actually surpassed the peak that we saw back in 2008. In other words, the recession is over,” said Spencer. “Not only is the recession over but the recovery is technically over and we’re now moving into a period of expansion.”

“The UK’s labor market is unlike any other. Incomes are being boosted by more members of the household entering or remaining in employment rather than heftier pay checks and borrowing,” said Spencer. Investment in housing is forecast to accelerate from 7.6 per cent this year to 13.4 per cent in 2016 with the strength in demand boosting house builders.

The Item Club predicts that capital spending by companies will rise by 12.5pc this year, reducing the reliance on the consumer spending which has so far largely driven the economic recovery. Yet the return to pre-recession output comes long after equivalent milestones in other large European economies and in the USA, which reached it in 2011.

The sustainability of the recovery has been questioned, with Kenneth Clarke, the recently sacked cabinet minister and former Chancellor of the Exchequer, saying it was “only halfway through”. In a newspaper interview he said: “We’ve saved the country from calamity but we’ve got a long way to go before we get a competitive economy with sustainable levels of growth.

“It’s not firmly enough rooted on a proper balance between manufacturing and a wide range of services and financial services. I mean, we have this mystery of why we can’t get productivity to start rising again.”

But Mr Spencer disagreed with these comments, claiming that future growth will be more sustainable because it will be financed by a rise in the number of people who work, not consumer borrowing or a growth in wages. He said employment growth was being driven by older workers retiring later, benefit claimants coming off welfare, and immigrants entering the country, which has compensated for a fall in wages.

He added that changes to the way GDP is measured, such as including black-market trading such as prostitution and drug dealing, may show the UK “sailed past the previous peak long before”. Read more about the story here.

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