London Briefing: Britain recovering but manufacturing lags

The road to economic recovery has been long and hard. Now, finally, Britain’s gross domestic product per head of population has returned to levels last seen before the financial crisis struck.

GDP figures released yesterday marked the 10th consecutive quarter of expansion – the third-longest period of unbroken economic growth seen in this country since 1955.

Overall, the economy is 5.2 per cent bigger than it was at the start of 2008. But it’s the first time that GDP per capita – widely regarded as a better indication of prosperity, as it allows for increases in population – has matched its pre-crisis peak.

After seven years, that is certainly a significant milestone in the recovery process. But, dig deeper, and the recovery looks less assured.

While the rebound in growth to 0.7 per cent in the second quarter, up from 0.4 per cent in the first three months of the year, is welcome, the unbalanced nature of the recovery is still a concern.

Britain’s services sector still dominates the economy and is leading the charge towards recovery, fuelled by consumer spending. Manufacturing, on the other hand, continues to struggle, shrinking by 0.3 per cent in the second quarter, the sector’s worst performance since early 2013.

George Osborne, visiting the Norton motorcycle factory in the Midlands, welcomed the figures, saying the country was "motoring ahead" and producing "as much per person as ever before".

Long-term future

The chancellor was there to publicise £4 million of government funding for the factory, an investment he said would support 600 new jobs, including 200 apprenticeships, in the next five years and secure the long-term future of UK motorcycle manufacturing there.

The funding is good news for Norton but the government’s drive to boost Britain’s manufacturing base in an effort to rebalance the economy away from services has had little real impact in recent years.

It was in his budget speech four years ago that Osborne declared he wanted to see “a Britain carried aloft by a march of the makers”. The phrase has come back to haunt him as Britain’s factories see their exports hit by the strong pound and the economy remains stubbornly skewed towards the dominant services sector.

Of the 0.7 per cent growth seen in the second quarter, 0.5 percentage points was contributed by services. The volatile mining and quarrying sector, which includes oil and gas, turned in the best performance since 1989 but construction, another important component of economic growth, was flat.

Still, balanced or not, it’s a recovery, and economists are forecasting a figure of around 2.6 per cent for the full year, again putting the UK on course to be the strongest growing economy among the G7 nations, as it was in 2014.

Hand in hand with the recovery must come a rise in interest rates, which remain at a record low of 0.5 per cent, where they have been since March 2009. The Bank of England's rate-setting committee, the Monetary Policy Committee, will hold its regular monthly meeting to discuss rates next week. Although some, such as the Institute of Directors, are calling for an immediate rate rise, most economists do not expect any change from the MPC until the turn of the year.

Expectations of the first rate rise in eight years were brought forward earlier this month after bank governor Mark Carney said the era of ultra-low rates was coming to an end.

Accounting scandal

If

Stephen Hester

thought he was going to have a quieter life when he left Royal Bank of Scotland to head insurer

RSA

18 months ago, he was very much mistaken.

Since taking over as chief executive in February last year in the wake of the accounting scandal in RSA’s Irish operations, Hester has faced a shareholder revolt over his £5 million pay package.

Now RSA is a takeover target, with news that cash-rich rival Zurich Insurance is considering an offer likely to value the British insurance group at more than £5 billion.

Shares in RSA soared by 18 per cent as Zurich confirmed its interest, although RSA, urging shareholders to take no action, said it had held no talks with nor received any proposals from Zurich.

Analysts suspect Zurich's interest could spark a bidding war, hence the spike in RSA's shares. Zurich now has until the end of August to make a formal offer for RSA. It looks like being a busy summer for the former bank boss. Fiona Walsh is business editor of theguardian.com