George Osborne recovers his swagger with economy on the mend

Link to video: George Osborne hails UK growth figures

Michael Heseltine had a very simple rule. Give me economic growth, the former deputy prime minister used to say, and I will deliver you political success.

The truth of the Heseltine rule has been on display in recent weeks. As the political world counted down to confirmation on Thursday of improved economic growth – the first consecutive quarters of growth since 2011 – the fortunes of George Osborne and David Cameron improved immeasurably.

Cameron has had a strong run at prime minister's questions over the past month and heads off on holiday as the pre-eminent figure on the political stage because his MPs believe the chancellor is at last delivering the private-sector recovery he promised in his emergency budget in June 2010.

Cameron and Osborne may have had something of a swagger about them in recent weeks as they watched Labour embark on a difficult – and not wholly successful – change of tack on fiscal policy. But their confidence is in sharp contrast to Osborne's dark mood in private last year and into the early part of this year.

The chancellor was genuinely worried that the apparent failure of his plan to trim back the public sector and to preside over a private-sector recovery was weakening him and hobbling the government. He often appeared nervous and ill at ease in public and, strangely for such a confident figure, would ask how he was doing.

Osborne's personal uncertainty has evaporated, for the moment at least, and the Osborne operation is sharpening up, helped by the arrival of the former BBC producer Thea Rogers who has a beady eye for pictures that tell a positive story.

Overnight the chancellor made visits to teams working on M6 improvements and to a 24/7 Tesco depot, tweeting updates with the hashtag #hardworking. Rogers hasn't left anything to chance: visiting nightshift workers at the Warburtons bakery, Osborne sported a baseball cap to avoid pictures of him in a hairnet.

This highlights the care with which the Osborne team has prepared for this moment. Wary of the experience of Norman Lamont, who was lampooned for talking about the "green shoots of economic spring", Osborne initially said the economy was simply healing. He now says it is "on the mend".

But it will not be plain sailing for Osborne between now and the general election in 2015. If growth stumbles, his nerves will return.

Ed Balls, who is visiting Washington to launch a transatlantic growth commission with the former US treasury secretary Larry Summers, is still on Osborne's case. Balls welcomed the growth but said it appeared to be benefiting only higher-income groups and was overdue.

Osborne will also have to answer a question raised even by some of his closest allies: why did he outline a deficit reduction plan in his emergency budget of 2010 that appeared to fit a political rather than economic timetable?

Osborne said in 2010 that he hoped to eliminate the structural budget deficit by 2015. One ally said the plan was flawed from the start because Britain was recovering from a once-in-a-half-century financial crash rather than a typical recession. It usually takes eight to 10 years to recover from a crash, meaning 2018 was a more realistic goal. This is now Osborne's target date.

No doubt Osborne will have a handy answer to criticisms that his political double is Gordon Brown, the last chancellor for whom politics trumped everything else.

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George Osborne's description of the economy is near-Orwellian | Ha-Joon Chang

George Osborne this week. 'The UK's economic performance since the start of the coalition government … has been so poor that Thursday's announcement of 0.6% growth … was greeted with a collective sigh of relief.' Photograph: Christopher Thomond

If all else fails, they say, you can always lower your standards. This is what we have become used to doing in relation to the UK economy. The UK's economic performance since the start of the coalition government in May 2010 has been so poor that Thursday's announcement of 0.6% growth in the second quarter of 2013 was greeted with a collective sigh of relief.

Having declared the UK economy to be "on the mend" on the strength of this growth figure, George Osborne is said to have regained his swagger. Even the opposition grudgingly acknowledged that the latest figures were good enough news, although it was quick to add that the benefits of the recovery have been almost exclusively concentrated at the top.

But even the opposition's interpretation may be too charitable. Including the last quarter, the UK economy has grown by just 2.1% during the 12 quarters since the current government came to power. This compares very poorly with the 2% growth that the economy had managed in just four quarters between the third quarter of 2009 and the second quarter of 2010. The coalition blames this poor performance on the eurozone crisis. But this argument is not very persuasive when output has more than recovered to pre-crisis level in many eurozone countries, including France and Germany, while UK output is still 3.3% less than what it was at the beginning of 2008.

It gets worse. During the past five years, the UK's population has grown by 3%. This means that, on a per capita basis, the country's income is 6.3%, not just 3.3%, less today than it was five years go. This performance is far worse than what Japan managed during its infamous "lost decade" of the 90s. At the end of that period, Japan had a per capita income 10% higher than at the start.

If the UK is to match this performance during what looks certain to be its own "lost decade", it will have to grow at the rate of 3.9% every year for the next five years (or 3.3% in per capita terms, assuming that the past five years' population growth rate of 0.6% per year continues). Even the most optimistic cheerleaders for the coalition government are not talking such numbers.

Thus seen, describing the UK economy as being "on the mend" is a near-Orwellian redefinition of economic recovery. The fact that most people accept that description, even if with reservations about the uneven distribution of its benefits, shows how low the standard of performance we expect of the UK economy has become.

But even applying this low standard, it is not clear whether we can expect a sustained recovery in the coming years. There are at least two factors that can derail the recovery process, especially given that it is so feeble. The first is the likely evolution of the global economy. The eurozone may be dragging itself out of a recession, but things can turn for the worse at any moment. Especially given the severity of austerity in countries such as Greece, Spain and Portugal, the policy's continuation may result in another bout of political unrest, negatively affecting the economy.

Thanks to its avoidance of the worst form of austerity policy, the US economy has recovered from the 2008 crisis more strongly than the European countries. But with another federal debt ceiling negotiation looming later in the year, it is possible that the US recovery will be set back by another round of budget cuts. The Chinese economy has visibly slowed down. And the Chinese government seems determined to keep it that way for a while. Concerned with financial stability, it has clamped down on credit expansion. Worried about seething public anger against government corruption and extravagance, it has imposed a ban on "wasteful" government spending (lavish buildings, banquets, and foreign trips). These are all good policies in the long run, but they will dampen Chinese demand in the immediate future.

The other two biggest "emerging" economies, Brazil (second largest) and India (third), have both seriously slowed down in the last couple of years. India's growth rate fell from 10.5% in 2010 to 6.3% in 2011, and then to 3.2% in 2012. The equivalent figures for Brazil were 7.5%, 2.7%, and 0.9%. Both these economies suffer from high inequality and social tensions, as shown by the recent protests in Brazil and the resurgence of Maoist guerillas called the Naxalites in the eastern part of India. Therefore there is always a possibility that political unrest may dampen these economies even further.

These global factors are, of course, beyond the UK's control, but there is another factor at least partially within its control that may derail the recovery. It is the asset bubbles that have developed in the stock market and the property market, fuelled by cheap credit (sounds familiar?).

Share prices have reached levels that simply cannot be justified by the state of the economy. In May 2013, the FTSE 100 share price index surpassed the pre-crisis peak of June 2007, although it has come down a bit since then. Given that the pre-crisis peak was supported by a buoyant (albeit unsustainable) economy, current share prices, which have no such support, can only be described as an even bigger asset bubble.

Although the rest of the country is still experiencing a stagnant housing market, property markets in London and the south-east are beginning to look inflated, given the state of the economy. And the government is stoking this property bubble with the Help to Buy scheme.

These asset bubbles have provided important sources of demand in the UK economy in the past few years. But the trouble is that they are quite shaky even for asset bubbles, for they are only sustained by historically low interest rates and the massive indirect subsidies given to banks through the so-called quantitative easing scheme.

The fragile nature of these bubbles is revealed by the nervousness with which financial market participants react to pronouncements by central bankers. They know that the current price levels are viable only with QE, so they are readying themselves to jump as soon as there is a sign that it may come to an end. When the asset bubbles deflate, there is likely to be a serious fall in demand that will derail the recovery.

In the past few years the UK should have found a way to stage a recovery without having to rely on state-sponsored asset bubbles. As it hasn't even tried, it is facing the prospect of having a "lost decade" that is even more "lost" than the original one in Japan.

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George Osborne hails UK growth figures - video

Growth boost puts Labour on back foot

PM and chancellor hail faster recovery as Ed Balls says life is getting harder for everyone except millionaires

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Growth of 0.6% may not look much, but it's a huge deal for George Osborne

George Osborne meeting Tesco distribution centre staff near Rugby the night before the release of GDP figures. Photograph: Stefan Rousseau/PA

When he was at the Treasury, Gordon Brown enjoyed waxing lyrical about Britain's growth record under Labour. The number of successive quarters of expansion had risen above 60 by the time Brown became prime minister, allowing him to trumpet the longest uninterrupted period of rising national output since the dawn of the industrial age.

Back then, news of a 0.6% quarterly increase in gross domestic product would have been neither here nor there. The economy grew by around 2.25%-2.5% on average for more than a century, or around 0.6% a quarter. In the City and at Westminster, Thursday's release from the Office for National Statistics would have been shrugged off as no big deal.

Times change, though. After the long expansion of 1992-2007, the economy plunged into recession in early 2008 and has yet fully to recover. Had it continued to grow at its average pace, national output would now be around 13% higher than it was before the downturn began; in fact it is still 3.3% lower even after the pick-up in the second quarter. In round numbers, the economy is £250bn smaller than it would have been had the recession never happened.

All of which makes Thursday's growth figure a very big deal indeed. George Osborne was in the Midlands on the night before the release of the GDP figures talking to workers in Britain's 24-hour economy because the chancellor knows that politics between now and the general election will be shaped by the argument over growth. Ed Balls knows that too, which is why the shadow chancellor was eager to point out that Britain's recovery was the slowest in a hundred years.

Osborne has not had an easy three years as chancellor. His plan for economic recovery is at least two years behind schedule and the idea of rebalancing growth towards exports and manufacturing has been quietly ditched in favour of the time-honoured remedy to weak activity: ramping up the housing market. Progress in reducing the budget deficit has stalled, and while unemployment has risen far less sharply than in the recessions of the 1980s and 1990s, workers have been forced to accept below-inflation pay increases or fewer hours to keep their jobs.

This matters politically. Governments that preside over periods when wages are growing more slowly than prices – Labour in the late 1970s for example – tend to lose elections. Those that are in power when living standards are rising – the Conservatives in the 1980s, Labour in the late 1990s and early 2000s – tend to get re-elected.

Even in times when growth has been strong and real incomes rising, no government since 1955 has been re-elected with an increased share of the vote, and David Cameron won only 36% in 2010. Little wonder then that the chancellor noted cautiously on Thursday that there was a long way to go.

But Osborne is not the only one with a headache. Labour has a far smaller lead in the opinion polls than it would need to feel comfortable about winning a general election in 2015, particularly in the context of a lost decade of living standards, austerity that will extend well into the next parliament and a recovery that is comfortably weaker than that which followed the Great Depression. Despite all that, voters have more faith in Osborne than Balls to run the economy, a testimony to the fragility of Labour's position.

When he became shadow chancellor, Balls faced three challenges: he had to make a convincing case that Labour was not single-handedly responsible for the slump of 2008-09 and the record peacetime deficit that resulted; he had to show that Osborne's austerity plan would hinder rather than hasten recovery; and he had to deliver an alternative to the coalition's strategy that would persuade voters it was worth giving Labour another try in 2015.

So far, his record is one out of three. Labour's warnings about the perils of austerity were borne out by two years in which the economy moved sideways. But the notion that Labour's profligacy in power threatened Britain with bankruptcy was well entrenched by the time Balls became shadow chancellor and has been hard to shift. Likewise, Labour's offer of austerity-lite after 2015 has not exactly caught the imagination of the public. There has been little to suggest so far that the opposition has the answers to Britain's long-term structural problems: the decline of manufacturing; the over-reliance on the City; the decades-long squeeze on wages that has encouraged debt-fuelled consumption.

Labour's position will be yet more difficult should the economic news remain even modestly good. Osborne wants to go into the next election with the following message: we inherited a right old mess from the last lot; that mess has taken us longer than we expected to clear up; we stuck to our plan when the opposition told us to change course; the benefits are now coming through; so don't hand power back to the people who screwed up in the first place. He doesn't need the economy to grow at 1% a quarter to construct this sort of political narrative: 0.6% or so a quarter will do fine.

The government's message will lack potency if the 2015 election approaches with real incomes still falling and fresh public spending cuts on the horizon. It will be blown out of the water if the economy stalls again between now and the election, something that currently looks unlikely but cannot be entirely ruled out. There will be a reckoning for the economy but that looks likely to be early in the next parliament when the Help to Buy support for the housing market is removed, interest rates start to rise and austerity continues for a sixth and seventh year rather than over the next 18 months.

In the meantime, Osborne, who looked like a dead man walking three months ago, is very much back in the game.

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UK GDP growth of 0.6% shows 'Britain is on the mend,' says George Osborne

Link to video: George Osborne hails UK growth figures

Britain's recovery picked up pace in the second quarter, official figures have confirmed, with GDP expanding by 0.6%.

George Osborne, the chancellor, welcomed the fresh evidence that the economy has moved, as he has put it, "out of intensive care".

"Britain is holding its nerve, we are sticking to our plan, and the British economy is on the mend," he said, "but there is still a long way to go and I know things are still tough for families. Unlike the unbalanced economy before the crisis, we are going to make sure that everyone benefits from this recovery."

Labour's shadow chancellor, Ed Balls, speaking from the US, said the stronger growth was "both welcome and long overdue" – but he stressed that for most families, living standards are still falling. "While millionaires have been given a huge tax cut, for everyone else life is getting harder with prices still rising much faster than wages." Balls added that the US economy has grown almost three times as fast as the UK's since mid-2010.

The 0.6% quarterly rate of growth was twice the pace of the first three months of 2013, and exactly as predicted by economists, after signs of a pickup in retail sales and strong readings in business surveys.

"The economy is coming out of the shadows, with a doubling in its quarterly growth rate from 0.3% in Q1 to 0.6% in Q2. The recovery is not quite on dry land yet, but at least it is a step in the right direction," said David Brown, of consultancy New View Economics.

The Office for National Statistics (ONS) said that all sectors of the economy recorded growth between April and June. Both industrial production, and the key services sector, expanded by 0.6%, the ONS said, with construction – which has been a heavy drag on the economy in recent quarters – picking up by a healthier than expected 0.9%.

Within services, which makes up almost 78% of economic output, the ONS said there was "widespread growth" with retail and hotels, transport and communications, and business and government services ,all showing an improvement.

John Longworth, director-general of the British Chambers of Commerce, said its members had become more optimistic in recent months. "Firms are feeling upbeat and are capable of expanding. More and more are adopting a 'have a go' attitude when it comes to exporting, which is really encouraging as this will go a long way to driving growth further still."

Measured at an annual rate, GDP was 1.4% higher than the same quarter a year ago, but the ONS stressed that the extra working day, after 2012 output was trimmed by the jubilee bank holiday, had flattered the calculation.

Despite the modest upturn, the economy still has not recovered the output that was lost during the deep recession of 2008-09: the ONS said GDP remains 3.3% below its pre-crisis peak.

The Treasury hopes that with the eurozone crisis in remission, the economy is now poised for a more solid recovery, after almost three years of flatlining. As recently as April, there were fears that after shrinking in the final quarter of 2012, the UK could have slipped into a renewed recession.

Chris Williamson, chief economist at City data provider Markit, said: "Prospects look good for a continuation of the recovery in the third quarter, with consumers and businesses both helping drive the upturn. There are even signs that exporters will see improved sales, helping drive the long-awaited re-balancing of the economy.

The relatively firm growth figure is also likely to influence the Bank of England's thinking, as it prepares to decide whether to deliver renewed stimulus to the economy in August. The new governor, Mark Carney, favours giving growth an extra fillip through so-called "forward guidance", which reassures financial markets and consumers that interest rates will remain low for a prolonged period; but other members of the Bank's monetary policy committee are known to be more sceptical.

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Royal Baby: George Gives UK Business Boost

By Emma Birchley, Sky News Correspondent

The UK's newest Prince might be less than a week old but he is already proving to be a trendsetter as aspiring parents race to keep up with the Cambridges.

Sales of Britax Baby Safe seats have trebled at Kiddicare superstores since the newborn set off in one on his first car journey after leaving St Mary's Hospital on Tuesday.

And there has been a surge in orders of the £45 hand-finished merino wool shawl made by GH Hurt and Son in Nottingham that Prince George of Cambridge was wrapped in for his first photo shoot.

Alex Fisher, commercial director at Kiddicare, said: "I think it's fabulous news in terms of parents engaging with the fact there is a Royal baby.

"I think it will encourage people to renew and buy new products.

"Parents look at what is the latest product, who is the latest celebrity, and I think on the back of that the seat by default becomes aspirational."

There was so much interest in the dress worn by the Duchess of Cambridge that the designer's website crashed earlier in the week.

But it later emerged that the Jenny Packham design was a one-off and not for sale.

The royal seal of approval has been a blessing for some companies

The Centre for Retail Research predicts the new arrival will end up boosting the UK economy by close to £250 million.

That includes everything from the champagne sipped to help celebrate the baby's safe arrival to commemorative mugs.

And Richard Cope, director of trends at market researchers Mintel, believes spending inspired by the young Prince will be sustained by visitors to the UK.

"Tourist numbers are up by about 10% compared with a year ago. They're going to be here throughout the summer and they buy into the concept of the Royal Family.

"The tourist factor is going to drag out spending for months and months."

But it is not just retailers enjoying the Royal feelgood factor.

William and Kate's chosen charities are already benefiting, including East Anglia's Children's Hospices (EACH), of which the Duchess is patron.

Melanie Chew, fundraising director of EACH, said: "The donations are coming in from the UK, but overseas as well.

"We have had all kinds of generous offers from an ornate handmade cradle from Poland, we've had children's bedroom furniture from Slovenia and we have a charm bracelet on its way, so it's been terrific."

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