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Economic recovery increases British PM’s political capital

After cutting the biggest budget deficit since World War II by a third, David Cameron leads what could be the fastest growing major economy in the EU. Photo: Andrew Winning/Reuters

After cutting the biggest budget deficit since World War II by a third, David Cameron leads what could be the fastest growing major economy in the EU. Photo: Andrew Winning/Reuters

Prime Minister David Cameron may be close to pulling off one of the most significant feats of his premiership: delivering a solid economic recovery ahead of a 2015 election.

Two consecutive quarters of growth have shifted the sands of British politics: six months ago, MPs in his Conservative party warned him that failure to lead Britain out of stagnation could cost him, and them, the election. Those fearful voices have fallen silent.

After cutting the biggest budget deficit since World War II by a third, Cameron leads what could be the fastest growing major economy in the EU this year.

“Will the better economic data change the political landscape? Well, economics is the biggest issue,” said Steven Bell, director of multi-asset investment at F&C Asset Management which has about £98 billion under management.

“Having pursued a policy of austerity, the Government will get credibility both for prudent management and for the recovery,” said Bell. “They will get the credit for this.”

Britain’s £1.59 trillion economy grew by 0.6 per cent in the second quarter after a 0.3 per cent rise in the first quarter, putting it on course to grow by at least 1.4 per cent this year.

That would be the strongest annual growth since 2010, the year Cameron forced Labour’s Gordon Brown from office by forming a coalition government with the Lib Dems after no party won an outright majority in a general election.

Some investors say Cameron’s policies may in fact be partly to blame for the recovery’s long wait. But they still expect the Government to benefit.

For Cameron and his Chancellor, George Osborne, the political gamble was always on economic growth. But even as signs emerge that their bet may be paying off, they remain cautious.

Party sources say they are acutely aware of the risk of premature triumphalism 21 months before the election.

When asked on almost a daily basis whether Britain is seeing “the green shoots of recovery”, Cameron’s spokesman says only that the economy “is healing” or “out of intensive care”. He always stresses that tough times still lie ahead.

Having pursued a policy of austerity, the Government will get credibility both for prudent management and for the recovery

Staking their reputation on reducing Britain’s debt mountain and nursing the economy back to health, Cameron and Osborne knew they had just a few years to make inroads into what they said was the profligate legacy of the 1997-2010 Labour governments.

Cameron’s party lost ground in opinion polls and was convulsed by internal rebellions over Britain’s ties with the EU and over gay marriage, while Labour warned voters austerity was killing off the recovery.

But from services and consumer spending to house prices, Britons’ best loved measure of economic virility, data now shows the world’s sixth largest economy may be about to do better than at any time since the onset of the 2007-2008 financial crisis.

Under its new Governor, Mark Carney, the Bank of England upgraded its mean growth projection this month by 0.8 percentage points to 2.5 per cent in 2014. If achieved, that would be Britain’s fastest annual growth rate since 2007.

“A renewed recovery is now underway in the UK, and it appears to be broadening,” Carney said at his first news conference as Bank chief while unveiling a promise – with caveats – not to raise interest rates above 0.5 per cent until unemployment falls below seven per cent.

While a recovery is under way, the economy is a long way from regaining its pre-crisis strength. Britain remains vulnerable to any more shocks from the eurozone debt crisis and voters’ incomes are at some of their lowest levels in a decade.

Yet ultra-loose monetary policy, support for the housing market, the potential of North Sea oil production, and the ability to ease the pain of austerity with tax revenues give Cameron one of the best economic backdrops of his premiership.

If he can keep the recovery on track right up to the next election, Cameron’s chances of winning – possibly even the Conservatives’ first outright victory since 1992 – increase.

If he wins, Cameron has promised an in-out referendum on Britain’s membership of the EU by the end of 2017. Economic growth could ease voter unease at immigration – one of the drivers of anti-EU feeling in Britain.

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