Britain’s years of famine may be over.
The economy probably grew for a sixth consecutive quarter in the three months through June, returning gross domestic product to levels last seen before the financial crisis. Output this year is on course to surpass its 2007 peak, ending an era that Bank of England officials used to describe in biblical terms as “seven lean years” following “seven years of plenty.”
Britain’s revival may provide a fillip to Prime Minister David Cameron as he seeks re-election next year, and heap pressure on BoE Governor Mark Carney to begin removing emergency stimulus. While policy makers have resisted lifting interest rates from a record low, there’s a 40% chance one of them voted for an increase this month, according to BNP Paribas SA.
“The story continues of a pretty consistent and fast rate of growth,” said David Tinsley, a former BoE official who’s now an economist at BNP Paribas in London. “Policy makers will need to think about tightening. We’re getting close to the point where the first MPC member votes for a hike.”
Carney, who will speak in Scotland on Wednesday, has whipsawed investors over the last six weeks with contrasting communications on the timing of policy tightening.
On July 15, he said officials are only giving guidance on the path of rates, not the timing of the first increase, and insisted he will be “guided by the data.” A slew of reports this week including retail sales, government borrowing and house prices will help illustrate the recovery’s progression.
GDP expanded 0.8% in the second quarter, matching the first quarter’s growth, according to the median estimate of 36 economists in a Bloomberg survey. On an annual basis, the economy grew 3.1%, the most since the final three months of 2007, a separate poll predicted before the release on July 25.
That will push GDP past its pre-recession peak in the first quarter of 2008. Former Bank of England Governor Mervyn King in June 2011 predicted “seven lean years” for the world economy. Former Deputy Governor Charlie Bean also used the language from the Bible’s Old Testament in a speech this year.
“My first seven years were years of plenty,” he said, referring to his time at the BOE from 2000-2014. “But the second seven years were years of famine, as the Great Moderation turned into a Great Tribulation.”
While that metaphor might imply Britain is due a return to years of bounty, it’s only the last of the Group of Seven nations, excluding Italy, to regain its pre-recession level. The U.K.’s difficulty in doing so was exacerbated by the lost ground to make up: the peak-to-trough drop in GDP that began in 2008 totaled 7.2%, the biggest slump since World War II.
Carney and his officials have chided investors for failing to appreciate risks to the recovery, including geopolitical tensions as well as threats from elevated debt levels and a surge in property prices. The European Central Bank is pumping stimulus into the euro (CME:E6U14) area, Britain’s biggest trading partner, and while the Federal Reserve has started to scale back asset purchases, it is still buying $35 billion of bonds a month.
Some U.K. reports have added to the case for caution. Manufacturing slumped in May, while construction slid and pay, excluding bonuses, rose the least since records began in 2001.
The EY ITEM Club said today that sluggish wage growth and inflation below the 2% target will prompt policy makers to keep their key rate on hold until the first quarter of next year.