A fair wind for George Osborne’s new growth talisman

A fair wind for George Osborne’s new growth talisman

George Osborne could not have hoped for more when he unveiled Carney as his growth talisman last November. Since Carney was appointed, growth has surprised on the upside twice – at 0.3pc in the first three months of this year and 0.6pc between April and June.

It’s early days, but economists are already talking about 0.7pc or 0.8pc for the third quarter. And that’s before Carney has done anything of substance. The rapid rebound in the nation’s fortunes has now raised questions about whether the new Governor even needs to unveil a “contingent commitment” to keep rates at their record low of 0.5pc for a set period, as he is expected to do tomorrow.

Much will depend on what he sets as the “contingent” target. The think-tank Reform says in a paper today he should go for a nominal growth target of around 5pc. In other words, to keep rates rock bottom until growth plus inflation reaches and remains at 5pc.

Others have suggested a GDP level goal that would leave rates on hold until the UK had recovered all 7.2pc of output lost in the recession. At the last count, Britain was still 3.3pc short.

One thing is certain, after five years of recession and stagnation, nobody is getting their hopes up. “We have been here before,” acknowledged Buckley. After the financial crisis ended in 2009, growth started to pick up, hitting 1pc in the second quarter of 2010, then slumped.

Much of that was down to the eurozone crisis, but the sharp growth in early 2010 also partly reflected the afterglow of Gordon Brown’s Keynesian rescue package.

This time, there is more reason to hope. The economy is expanding despite government spending, not because of it. Just 0.1pc of the 0.6pc second-quarter growth was down to “government and other services”. The recovery is now being driven by the private sector.

Rather than relying on struggling export markets, growth is home-grown – built on the back of six consecutive quarters of rising consumer spending. The banks have cleared tens of billions of pounds of bad assets from their books since 2009 and lending to households and small businesses is climbing at last.

If there is one area of concern, it is wages, rising at just 1.1pc in the private sector, excluding bonuses, against inflation of 2.9pc. The good news, though, is that inflation appears to have peaked.

Carney’s task now seems rather different from the one he faced last November. His job now is “to support and not kill the recovery”, as HSBC UK economist Simon Wells put it.

At this point in 2010, two rate-setters were voting to increase rates. This time, they will be promising not to – to give households one last chance to prepare themselves for the inevitable mortgage squeeze. With the eurozone crisis still lurking in the background, and questions being asked about the sustainability of growth fuelled once again by debt-fuelled consumer spending, economists say this is no time to throw caution to the wind.

Carney will be hoping that low rates will put a little extra wind in the economy’s sails, to ensure the strong growth signalled by the July PMIs does not peter out.

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