It's not the same across the country, but there are signs of growth. The challenge for Labour is how to make the most of the new reality
I'd just finished saying, on camera, that the people of Rochdale gambled £72m last year when a young man came up to me, visibly shaken. "Don't say that," he whispered. "Look at this place. People are struggling to live. Some can't even put food on the table." But both facts are true. The Falinge estate, where I was filming, is officially Britain's most deprived area, with 72% unemployment and life expectancy of just 69 years. Yet just across the road is The Baum, voted the best real ale pub in Britain, buzzing on a weekday lunchtime with office workers, businesspeople and the "young retired".
As the economy struggles into recovery mode, perceptions can get distorted. Every news story about GDP prompts the claim that journalists are engaged in "propaganda"; that the recovery is either false or illusory, based on an unsustainable credit splurge, or on contingent factors such as PPI compensation. Or that it is confined to south-east England, and unreal everywhere else.
With last Friday's upward revision to GDP figures, there is clear evidence for a real recovery. It may be the wrong kind of recovery, may be temporary, and may yet again hit buffers external to the UK, but it can still be all of these things and real. The latest Office for National Statistics figures show the economy grew 0.7% from April to June, with growth across all sectors. The trade gap narrowed. Salaries rose faster than in any period since the dotcom boom of 2000, boosted by a slew of bonus payments.
There are three political implications. First, the argument that fiscal austerity would lead to deep recession or permanent stagnation has proved false. In part, this is because the austerity is back-loaded, with the heaviest cuts starting now. But the economy has also refused to behave as the doomiest predicted. People have clung to jobs, even at the cost of tolerating zero-hours contracts, wage cuts, pension raids and unpaid overtime.
It is true that GDP per head is stagnating. It is also true that if you measure GDP against the retail price index, instead of the government-preferred CPI, it is flat. It's also true that growth is patchy regionally – not just between regions but even within small towns, as Rochdale shows. However, the headline GDP figure is important. If, in the next few quarters, its growth is sustained, the narrative of the government's critics on the left will have to change.
But sustaining the recovery is where the second political problem begins. Our last mini-recovery was choked off by inflation: real spending power shrank and growth went into reverse. This time there is more government money flowing through the credit system, through Help To Buy, and the funding for lending scheme – where the government underwrites bank lending risks. So this time the recovery may be able survive renewed inflation.
And that means it's Mark Carney, the new governor of the Bank of England, who will have the problem. To be clear – clearer than Carney has been himself – the Bank's new policy is to signal loudly that there will be no interest rate rises until 2016, while at the same time signalling quietly that there might very well be. Carney hopes borrowers will hear the louder signal, and that the effect will be stimulate demand for credit. But if growth and inflation both take off, Carney will be forced to make much more explicit a policy known as "financial repression". This involves holding interest rates on long-term debt consistently below inflation, inflating away not just the debts of governments but of households and banks, at the expense of savers. The textbook example of this was in the late 1940s and 50s, when – as Carmen Reihart and Beren Sbrancia pointed out in an IMF discussion paper– the developed world's debts shrank from 100% of GDP to 20%, alongside a global economic boom.
Under Mervyn King, the combination of quantitative easing with consistently above-target inflation looked like a mild version of financial repression. There is a growing appetite among policymakers for a more overt version – using loose money for longer than necessary so as to prolong the process of "structural reform" – ie shrinking the welfare system and the power of organised labour. IMF boss Christine Lagarde spelled this out at her speech in Jackson Hole on Friday.
This prompts the question of what Labour's stance should be on a more aggressive and overt pro-inflation strategy. Shrinking the debt by means other than austerity underpinned the post-war Keynesian era. Should the left, today, propose its own version to mitigate austerity?
The third political challenge, if recovery persists, involves the Treasury's watchdog, the Office for Budget Responsibility. When the OBR decided, in November 2011, that the UK's potential to grow had permanently shrunk, it forced George Osborne to pledge two more years of austerity, and to deepen the cuts already under way. A further revision downwards, last December, pulled the year 2018 into the austerity plan. Some economists have questioned the OBR's understanding of this so-called "output gap" figure, insisting the gap is much bigger – and so permits much more short-term growth – than the government's experts imagine.
If the UK economy bounces back fast, the OBR may come under pressure to rethink its methodology and, towards the end of this year, predict a more rapid recovery and a more rapidly falling deficit. That would create an interesting political debate between Labour and the coalition: cancel some of the austerity or stick with it, despite the improved growth position, in pursuit of the wider objective of shrinking the state?
That debate is now a serious prospect, and something the left might find more fruitful than simply denying the recovery is taking place. Either way, a more strategic problem remains. The long-term trend of rising output – spectacular between the fall of the Berlin Wall and the fall of Lehman Brothers – cannot return. The recovery path will be less vigorous because pure credit expansion, on the scale of the 90s and 00s, can't be repeated. And for Falinge, Rochdale, and hundreds of places like it, that means even the recovery phase will probably look bleak.
The kind of recovery it would take to restore Britain's provincial towns and welfare-dependent estates to a tangibly improving lifestyle looks impossible, without much more radical policy. The real problem may not be the weakness or fragility of recovery, but the fact that large parts of the population are locked out of it.