Why we look set for growth not ‘triple dip’

After the experience of the past four years it never does to be cheerful about business prospects. But there are growing grounds to believe that consumer confidence is improving, mortgage lending is on the rise – and the UK economy may – at last – be returning to growth.

That’s a brave forecast to make considering that the economy shrank by 0.3 per cent in the fourth  quarter, feeding fears of an unprecedented “triple dip” recession.

But positive pointers are there to see. And it is likely that the Bank of England’s Monetary Policy Committee will decide later this week to ‘look through’ the downbeat GDP number and hold back from further resort to Quantitative Easing.

Business start-ups and SMEs have had a torrid time over the past twelve months, particularly with stretched household finances putting a dampener on retail spending. But there are encouraging pointers that the worst may at last be over:

ONE: The latest UK manufacturing purchasing managers’ survey provides support for hopes that the UK economy can return to growth in the first quarter of 2013, with no indications in the survey that the snow had a major dampening impact on manufacturing activity. The survey indicated output growth at a 16-month high in January, and with the third successive rise in new orders in January. Manufacturing employment edged up in January for the first time in nine months.

TWO: The latest confidence monitor from ICAEW/Grant Thornton shows private sector sentiment consistent with the economy growing by 0.4 per cent in the current quarter.

This index has climbed over the last three months to a positive reading of 12.8 from 4.2 – where anything over zero shows an improvement in business confidence – signalling sentiment is at its highest in almost three years. And a rival survey from Lloyds Bank shows firms’ sentiment about their trading prospects has hit an 18-month high.

THREE: Housing activity continues to improve. The Nationwide has reported that house prices started 2013 on a modestly firmer note, following a soft performance in 2012, with a rise of 0.5 per cent month-on-month. Prices had previously been flat month-on-month in both December and November. Meanwhile the Bank of England has reported that mortgage approvals rose for a fifth month running to hit an 11-month high of 55,785 in December. This was up from 54,011 in November and above the average monthly level of 51,133 seen during 2012. The increase in mortgage approvals suggests that the Bank of England’s Funding for Lending Scheme (FLS) is having an effect. The scheme gives banks access to more credit for longer and at lower rates when they lend more. By making mortgage credit more readily available this has allowed banks to offer higher loan-to-value ratios, reducing the deposits demanded of first-time buyers.

FOUR: UK consumer confidence recovered in January after a sharp relapse in December, according to a European Commission survey. It hit its second highest level after (November) since May 2011. This reflected reduced pessimism over the economic outlook and the economy’s performance over the past 12 months. Consumers were also slightly more optimistic about their prospects for their personal finances in January. The European Commission’s survey also revealed a slight easing in unemployment concerns in January.

However, confidence  still remains very low compared to normal levels and the suspicion remains that consumers will be very careful in their spending in the near term at least, thereby limiting overall growth prospects.

FIVE: JOB CREATION continued buoyant in the quarter to November, with employment up by 90,000 across the UK in the quarter, 552,000 higher than a year earlier, to a record 29.68m. Significantly full-time employment was up by 113,000 in the quarter, whilst part-time employment fell by 23,000 - contradicting the hypothesis that the job creation was mainly part-time. Additionally, the number of part-time employees accepting part-time work because they could not find a full-time job slipped further.

For these reasons it would make sense for the MPC to “look through” the veil of a poor Q4 GDP performance and give the Funding for Lending Scheme further time to work.

If all else fails and business surveys fall flat again over the coming weeks, chancellor George Osborne will have every reason to pull out all the stops for growth in his budget scheduled for March 20: it would be a desperate last throw of the dice.