• On average, economists expect the UK economy to grow by around 3.0% in 2014, almost twice what was expected a year ago. This week we consider why the UK economy has bounced back so rapidly.
  • Probably the biggest factor is that low interest rates, Quantitative Easing and cheap money policies have finally fed through to the economy. Operating monetary policy is sometimes likened to pulling a brick on a piece of elastic. Nothing happens, you keep pulling and then, suddenly, a brick is flying through the air at speed. Massive dislocation in the financial system and elevated perceptions of risk made this a slower-than-usual process, but, to return to the simile, the brick is now in flight.
  • Over the last year, credit availability has improved for all sizes of businesses, mortgage lending has risen by 25% and consumer credit has started to recover. Easier credit conditions have helped fuel recoveries in car sales and in the housing market. The fact that the Bank of England policymakers are worrying aloud about the housing market shows that, in some respects, monetary policy may be too loose.
  • High inflation has been a significant factor behind the UK economy's poor performance in recent years. For most of the last four years earnings have lagged behind inflation, squeezing consumer spending power. The severity of that squeeze has eased in the last two years as inflation has fallen. Consumers have started to spend and, lower inflation, together with rising consumer borrowing and windfall gains from payment protection compensation, have provided the fuel.
  • The end of the acute phase of the euro crisis has also played a part in the recovery. A declining risk of a break-up of the euro area has reduced a major source of uncertainty and bolstered financial markets and business confidence in the UK.
  • Just over a year ago the International Monetary Fund warned that the government's programme of cuts in public spending was "playing with fire" and risked a third recession. The austerity has continued, yet growth has returned.
  • This falls short of complete victory for austerity. As Keynesian critics of the Chancellor's policies point out, the economy has been helped by an easing of the fiscal squeeze in the last year. Still, recovery has come even as the government has stuck to a recognisable programme of austerity.
  • Cheap money, lower inflation, improving prospects in Europe have helped drive Britain's recovery. Austerity has not proved as great a drag on growth as some feared. Recovery is taking root, so much so that policymakers are mulling when and how to intervene to calm things down. Investment and consumer incomes seem close to a turning point, offering the prospect of broader-based growth to come. Markets are worrying less about UK growth. Speculation about the timing and means of monetary tightening are likely to move centre stage.

MARKETS & NEWS

UK's FTSE 100 ended the week up 0.1%.

Here are some recent news stories that caught our eye as reflecting key economic themes:

KEY THEMES

  • More than four out of five UK SMEs plan to invest up to 7% of their turnover into business growth in the next 12 months according to a survey by Clydesdale and Yorkshire Banks
  • The Institute of International Finance (IIF) reports that, with over 90% of the S&P500 having reported earnings for Q1, some 70% of firms had positive earnings surprises
  • Japanese grew by a faster-than-expected annual rate of 5.9% in Q1, driven by a buying spree by Japanese consumers ahead of a sales tax increase in April
  • Ethiopia – which is one of the world's fastest growing economies currently – received its first ever sovereign credit rating by the major ratings agencies
  • China's industrial production growth dipped to its lowest in 5 years last month
  • Chinese President Xi Jinping said the nation needs to adapt to a "new normal" in the pace of economic growth and remain "cool-minded" about slowing growth
  • Analysis by The Daily Telegraph suggests UK banks and building societies have reduced the interest paid to savers by almost £1bn in a year via "a series of brutal cuts to both old and new savings accounts"
  • Two separate opinion polls gave the Conservatives a lead over Labour for the first time in more than 2 years
  • Transport for London have been commissioned to develop the idea of building a 22-mile underground ring-road — called the 'inner orbital tunnel' — in central London, in order to "free up capacity on the city surface"
  • A YouGov poll for Centre for Cities and Centre for London found that fewer than a quarter of people outside London believe that growth in the capital benefits their local economy
  • Luggage maker Antler said it will manufacture in Britain for the first time in 20 years, producing a new range of suitcases in the East Midlands
  • Debt written off by Europe's companies due to late payment or non-payment has risen to €360bn according to Intrum Justitia's 'European Payment Index', despite the pick-up in economic activity in the region
  • The Spanish treasury announced that it will issue its first ever inflation-linked bond, in order to diversify its funding avenues
  • Two-thirds of French voters believed their country's economy was worse than it was a year ago and felt less secure in their jobs, according to a survey for the Financial Times
  • Foxconn, the Taiwanese manufacturer of Apple products, is shutting operations in Vietnam for three days because of the anti-China protests
  • Bloomberg reported that Facebook is considering opening a sales office in China to provide support to local advertisers hoping to reach customers overseas
  • Fracking firm Cuadrilla announced that shale gas could be fuelling British homes for the first time by late 2015, under new plans submitted by the company to connect the test fracking sites up to the gas grid
  • Inmarsat, the satellite communications group, offered to track passenger jets for free using its network, and proposed a 'cloud-based black box'
  • The price of hops, a key ingredient in beer, has risen rapidly due to the craze for craft beer and microbrews made by small independent brewers – with craft beers requiring 4 to 10 times more hops than average lagers
  • Analysis of 800,000 UK job adverts by recruitment search engine Adzuna has found that 759 companies wanted "Gurus", with others seeking "superhero" and "rock star" skills, although the best-rewarded trait was "boffin" – hire education

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