Business needs to pick up the baton for recovery

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Britain’s economic recovery risks running out of steam unless business picks up the baton from the household spending surge that has so far powered the upturn, experts warn.

An unexpectedly dramatic improvement this year has been fuelled by consumers but economists say that corporate investment and exports must soon begin to take over as the main drivers of UK expansion.

The first half of 2014 could prove critical amid concerns that household spending is likely to come under threat from persistent low wages.

It follows a year in which the pace of growth has taken economists by surprise. There has been a dramatic change in mood since Chancellor George Osborne delivered his Budget in March.

Official figures at the time painted a grim picture as the forecast for 2013 gross domestic product (GDP) growth was halved from 1.2 per cent to 0.6 per cent.

The Autumn Statement earlier this month reversed the cut, upgrading the figure to 1.4 per cent and leaving many forecasters predicting the actual result will be higher.

Newly-revised figures show the first three months of 2013 saw GDP rise by 0.5 per cent, improving to 0.8 per cent in the second quarter and 0.8 per cent again in the third.

One reason for the overturning of economists’ expectations may have been that they had already factored in the likelihood of continuing international headwinds – along the lines of the earlier eurozone crisis – buffeting growth.

In addition, few had anticipated the resilience of the jobs market despite the poor state of the economy, or the dramatic impact of Government initiatives boosting confidence in the housing market.

Economists also seemed not to have appreciated the resilience of the British consumer, who has felt confident enough to cut back on savings and spark the recovery into life.

Samuel Tombs, UK economist at Capital Economics, said: “We should be getting to the point in a typical recovery where we’d see business investment pick up at this stage, given how far it has fallen. It’s still well below its pre-recession level.”

An improvement could be vital if consumer spending does tail off – with retail sales already starting to look shaky and stores banking on the Christmas period to shore up their balance sheets.

Mr Tombs said: “There could be a weak period of a quarter or two if other parts of the economy don’t pick up.”