Patience Wheatcroft: George Osborne has given us growth — now we need stability

When George Osborne became Chancellor of the Exchequer in 2010, he committed himself to a tough regime that would bring down the country’s record deficit and restore economic probity. “Austerity” would be the watchword. The world, and in particular its financiers, believed him and have continued to do so. Osborne’s triumph has been to retain their confidence while treading a path which has been far less austere than the rhetoric.

Having refused to heed those who called for more savage cuts, the Chancellor can now cite in vindication the strongest growth in the developed world. Last Friday, the Office for National Statistics reported that, at the end of the second quarter, the UK’s GDP growth was running at an annualised 3.2 per cent. That contrasts with just 2.4 per cent for the United States and a meagre 1.3 per cent for Germany.

Yesterday we learned that two members of the Bank of England’s Monetary Policy Committee believe inflationary pressures may not be far behind the buoyant UK performance: they advocated a pre-emptive rise in interest rates when the MPC met earlier this month. Admittedly they were only suggesting an increase from the extraordinarily low 0.5 per cent, which has now prevailed since the financial crisis really bit in March 2009, to 0.75 per cent. However, a majority of the committee felt that it was still too soon to risk any such potential jolt to the recovery.

Even at these low levels, a 50 per cent increase in rates would hit some borrowers hard. The hawks on this occasion, Martin Weale and Ian McCafferty, were influenced by the high levels of employment. The latest figures show that unemployment was down to just 6.4 per cent at the end of June. Only a year ago, the prospect of it shrinking to such a level seemed very distant. At that time the new Governor of the Bank of England, Mark Carney, famously issued his first “forward guidance” on interest rates, suggesting that there would be no increase until unemployment was down to seven per cent. Far sooner than he had expected, that target had been passed and the concept of forward guidance was effectively abandoned.

It had become clear that low unemployment itself did not signify an economy at risk of overheating. Even now, when there are many more people in work, they are not seeing any real growth in their earnings. In the three months to the end of June, wages grew by just 0.6 per cent, less than a quarter of the rate at which retail price inflation, the measure that includes housing costs, was rising.

Weale and McCafferty believe this could change quite rapidly, that the slack in the economy could be rapidly taken up by growth and that wages will take off, fuelling inflation. Sensibly, fellow MPC members took a more cautious view. For while the Chancellor’s careful approach has enabled the economy to rebuild after the meltdown of 2008, necessitating the biggest bank bail-out anywhere in the world, there are still risks ahead. In an unstable world, even the strongest economy cannot be sanguine about its prospects and, right now, the world looks distinctly shaky.

Both politically and economically, the global environment is unpredictable and potentially harmful. The growing conflicts in the Middle East, coupled with Russia’s invasion of Ukraine, raise massive question marks over the future of energy prices. This is beginning to show through in natural gas prices which, after five years of relative slump within the European Union, are now on the rise.

Meanwhile, the failure of the eurozone to get to grips with its problems means that what is currently the UK’s biggest export market is shrinking. In the second quarter of the year, Italy tumbled back into full-blown recession, with its economy shrinking by 0.3 per cent.

By contrast, the UK is experiencing the downside of Chancellor Osborne’s success. The strong pound, which only last month the International Monetary Fund declared to be “over-valued”, moved up again yesterday in response to the MPC minutes, making life even tougher for exporters. Confidence in the UK’s currency mirrors international confidence in the country itself. Hence the flow of overseas money into the UK property market.

What started as a London phenomenon has now stretched far beyond the capital: last month Nationwide reported that house prices nationally had now soared past their previous peak to new record levels, exacerbating a situation that was already putting home ownership beyond the reach of many average families. The Government’s Help to Buy scheme has enabled some to clamber aboard the property ladder and changes in planning law, releasing more brownfield sites, will enhance supply but prices remain at unhealthy multiples to average earnings.