Seven reasons why we are on the verge of a long-lasting recovery

Since the summer of 2012, which also saw the Bank of England introduce the Funding for Lending Scheme, interest rates have fallen sharply for consumers and firms, and their confidence has risen. Today consumers are more optimistic about the economic outlook than at any time since June 1997.

Third, there has been some rebalancing within the UK. Services output is above its pre-crisis peak, while manufacturing and construction lag. But services are not undesirable activities. Finance activity has fallen significantly since the crisis while other services have expanded. Computer programming is up 3.2pc year on year, for instance. Scientific and technical professional activities output rose 8.3pc year on year in Februrary. Administrative and support services were up 12.1pc.

Fourth, financial crises are painful. UK GDP is still 0.6pc below its 2008Q1 peak. Though it is above if we exclude energy extraction, which is on a long-term secular decline – an important point in the Scottish independence debate. That is an historically very slow recovery, as it has been in many countries.

Working through the crisis debris takes time and hurts growth. But the UK is emerging from that now. Households have cut their debt to income ratio back to where it was in 2003, for instance.

Fifth, austerity is painful. The UK implemented large front loaded austerity from 2010 to 2012. That contributed to the economy taking a long time to get back to its peak. To be clear, austerity was not the be-all and end-all, the euro crisis had a big effect, too. But austerity matters.

The slow UK recovery could also be partly the price for a big boom. Output is some 17pc lower than it would have been had the UK kept growing at its average rate in the 10 years before 2007 of 3.2pc year-on-year. But experience since 2007 could signal that pre-crisis growth was unsustainable. Elevated inflation since 2007 is consistent with that. Of course much of that has come from the exchange rate and energy prices. But If the bust had generated vast amounts of spare capacity, then inflation would have been weaker.

Sixth, the return to growth does not prove that austerity worked, in the sense of causing the recovery. The recovery probably has a lot to do with the pace of austerity easing back from the initial front-loaded effort and very loose monetary policy finally working.

Of course, austerity would have been needed eventually given the large structural budget deficit in the UK. No one will ever know precisely how the economy would have performed with less austerity – the counterfactual problem – though it can be estimated. But the return of growth alone does not prove a lot in this debate.

Seventh, the recovery could look even better after September when the number crunchers revise the growth figures. The really puzzling period is 2012, when the UK apparently did not grow yet employment did.

Guessing revisions is tricky. Many people have been arguing for years that revisions would make the recession smaller, yet the statisticians have not obliged yet. We will see, but the employment rebound in 2012 is one reason to think that year’s growth data will be raised.

As an aside, statisticians' revisions will also make households look more prudent in September. They will raise the household saving rate by between three and six percentage points by including in the figures from defined benefit pension entitlements when they are earned. The UK recovery is not a debt-fuelled boom. Debt is barely growing. The revisions will make it seem even less so.

The bottom line from all this is that the UK has had a tough few years but is now into a solid recovery. The UK is not doomed to zero growth forever. The significant growth problems over the past few years have been because financial crises are painful, our main trading partner had a crisis, there has been substantial austerity and we had an unsustainable boom before the bust. Those problems are fading now.

There are always risks to the recovery, from international events for instance. But now monetary policy is working, and firms and households see a brighter future, there is every chance, in my view, that this nascent upturn will become a long-lasting recovery.

Rob Wood is UK economist at Berenberg Bank and a former economist at the Bank of England

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