House prices are booming, industry struggles and a ratings agency warns that it remains troubled by the size of Britain's budget deficit. As he put the finishing touches to his third pre-budget report Alistair Darling could hardly have been given a starker reminder of the short and long-term challenges facing the economy.
Despite the boost from a cheaper pound, the Office for National Statistics said factory output stalled in October. The CBI employers group said manufacturers expected to trim production over the next few months. Meanwhile, Halifax – the UK's biggest mortgage lender – said the cost of property rose by 1.4% last month. The price of the average house is up by £13,000 to almost £168,000 since the trough earlier in the year.
Little sign yet, in other words, of the rebalancing of the economy being sought by the government in the aftermath of the longest recession in modern history. The economy, as it prepares to exit the slump, looks pretty much like the economy as it went in, only with a smaller financial sector and a much-diminished industrial base. In his last budget speech in March 2007, Gordon Brown boasted that Britain was top of the G7 league table for growth after the longest period of sustained expansion since the dawn of the industrial age.
What the then chancellor did not say was that the boom was built on unsustainable activity in housing and financial services, and that if those twin engines stalled the economy would nosedive.
That was precisely what happened from August 2007 onwards – a period that has brutally exposed how dependent the UK was on debt-fuelled consumer spending and the speculative activities of the City of London. In the pre-crisis days, it was not seen as a problem that the financial and business sector – which includes not just the City but all its satellite sectors such as accountants, lawyers and PR firms – was responsible for almost half Britain's growth. Far from it – the City was Britain's cluster of excellence. In an increasingly integrated European single market, each country would specialise in what it did best and in the UK's case that would be financial services.
The crash has re-opened an argument that has been raging off and on for the past century: does the size and power of the City stifle the other parts of the economy, preventing them from flourishing? After a decade in which the government pampered global finance, Labour now accepts the need for a more diversified economy.
Darling will ring-fence spending on science in the hope of encouraging hi-tech spin-offs from the universities. Lord Mandelson, the business secretary, opened a new advanced manufacturing centre in Sheffield last week. There is talk of a national investment bank to channel funds from the City into a small business sector starved of credit. The change of tack has been forced on the government, and it looks like being a long, hard slog. Although the crisis had its genesis in the financial sector, and it was widely expected that the City would be the biggest casualty, the impact on manufacturing has been far more severe. Output is down by 14% since it peak in 2007 and – if the CBI's monthly industrial trends survey is right – has still further to fall.
Tellingly, the first sector to show signs of life earlier this year was property, which has become far more pivotal to the economy over the past four decades. Low interest rates have so far failed to boost business investment or factory output although they quickly reversed the decline in house prices. But as with the City, activity remains well below pre-crisis levels.
From being the fastest-growing G7 nation in early 2007, Britain at the end of 2009 is the only member of the broader G20 group that remains in recession. The 25% devaluation of the pound has meant that the UK is now the seventh-biggest economy in the world – behind the United States, Japan, China, Germany, France and Italy. One team of analysts predicted this week that Britain would soon drop out of the top 10 altogether.
An unwanted by-product of the recession has been a rapid expansion of the government's budget deficit from just over 2% of GDP to 12% of GDP. The ratings agency Moody's made it clear that it was keeping a close eye on fiscal developments in four major economies given an Aaa rating: the United States, France, Germany and Britain.
"The next year or two will show whether growth potential has been structurally eroded or whether a sustainable recovery is possible," said Pierre Cailleteau, managing director of Moody's Sovereign Risk group.
"Next year, Aaa governments with stretched balance sheets will find themselves under pressure to announce credible fiscal plans and – if markets start losing patience – to start implementing them," he said, adding, "This will complicate the recovery and test political cohesion."