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Are things really looking up for the economy?

BITTER winds rattled rooftops the length and breadth of the country last week, but finally there were some signs of economic sunshine.

At least from the Coalition's point of view, anyway.

Chancellor George Osborne was able to stand up for his fourth Autumn Statement and claim that his strategy had been working.

Despite an extended period of brutal austerity, the economy is growing at a half-decent rate again. And although no-one would put it so bluntly, it has come as a complete surprise.

Only eight months ago, at the time of the Budget, the Government's official forecaster the Office for Budget Responsibility (OBR) thought that 2013 was going to be another turkey. It predicted that growth would reach an anaemic 0.6% in the latest staging post of the worst recovery in living memory. Several seasons later, it now says that 2013 will clock in at 1.4%.

This is not quite in the sort of 2.5% to 3% that the country needs if it is going to get on top of its debt problem, but it is both a big improvement on the near-stasis of 2012 and comes with enough promise to have emboldened the forecaster to mark up 2014 by 0.6 points to 2.4%.

The result of this improved picture is that borrowing is now expected to be £111 billion this year, £9bn below the last forecast as higher-than-foreseen tax receipts swell the national coffers.

And since the OBR also believes this better growth will continue later into the decade, the national debt is now expected to peak as a percentage of the total economy in 2015-16, a year earlier than the March prediction and with an 80% peak rather than the previous 85.6%. The more that the UK looks like avoiding the triple-digit debt percentages of some Mediterranean countries, the more that its future looks stable.

Or as the Chancellor put it at the despatch box on Thursday: "The plan is working; it is a long-term plan for a grown-up country. The job is not yet done but Britain is moving again. Let's keep going."

Dig through the 181 pages of OBR analysis and you find facts that both support and contradict this narrative. The agency makes it clear in virtually the first paragraph that we are not yet seeing the sort of data that suggests there is "stronger underlying growth potential".

It has mainly been created by consumers spending more than before, both in the high street and on big buys like cars and property. The latter market has been spurred by the notorious Help to Buy schemes, which help prospective buyers to get affordable mortgages with low deposits thanks to cheap Government loans to banks. They have caused enough anxiety in the London market that they are soon to be withdrawn. The troubling thing about this rising consumption is that it is people getting into more debt - much of it financed by the Government - rather than having more money in their pockets.

As John McLaren, an economist at the University of Glasgow says: "Recent consumption has mainly been about reducing saving, not because wages are growing."

Not only is this healthier form of consumption still largely absent, the other engines of a sustainable economy, such as business investment and exports, are still misfiring. Even compared with flaccid 2012, both these categories have been declining this year.

The OBR is forecasting that exports will improve a bit in the coming years and that business investment will improve a lot. Along with continuing growth in consumption, it is at the heart of the case for stronger economic performance in the future.

Admittedly, there are signs that it is turning. Sub-categories from services to construction have been picking up, with manufacturing doing well in Scotland. About 400,000 new jobs are expected to have been created during this year.

And many of the Purchasing Managers' Index surveys, which ask businesses how upbeat they are about the coming period, have been returning the best numbers in years lately.

Yet the OBR still sees limited potential. There is much talk of the output gap, jargon for the difference between current and potential economic performance. The OBR makes clear that the economy was permanently damaged by the crash and no longer has the capacity to achieve the sorts of growth seen in the past.

This leads some observers to believe it is being too gloomy about the future. Samuel Tombs, UK economist at London-based Capital Economics, says: "They think that output at the moment is not far below its potential level. We think they are underestimating that potential and think the economy could grow quite strongly for several years thereafter. Their assessment about the structural damage to the economy is much more bleak than most forecasters.

"Sterling is still quite weak and as credit constraints ease, this will enable exporters to expand. And business investment is cyclical, and many firms may feel that now is the right time to invest, given that the outlook is better than it has been for some time."

Nor does Tombs believe that the consumer growth is necessarily built on sand. He says: "The OBR's forecasts of 2% a year [consumption growth] aren't that strong by historical standards.

"The ratio of household debt to incomes has fallen quite a bit from its 180% peak in 2008 to 140% now and there may be some potential for it to rise further. While interest rates remain low, households can borrow more and not put themselves at too much financial risk."

Dougie Adams, an adviser to the Ernst & Young Scottish Item Club, agrees that borrowers needn't be overly nervous about interest rates surging. He says: "The question is, where is the inflation impulse that would make you have to put up rates very quickly? Indeed the worries are more about deflation.

"And if you did get inflation, you would only have to put interest rates up a little to stop it. I suspect we are in a world where rates are going to stay lower for longer."

He adds: "History tends to show that financial busts last for a long time, but you look at seven to 10 year work-outs. If you date our bust from the start of the subprime problems in August 2007, we are more than six years on now."

Others point out there have been several false dawns during this weak economic period and that we may well be experiencing another one.

Economist John McLaren says: "The positivity has been overplayed a bit. We have still got the underlying issues of the eurozone unresolved and the euro is still not viable in the long term.

"There's potential uncertainty around China and the Middle East. And in the UK, in every forecast, the OBR keeps just moving its previous forecast for business investment forward and waiting for it to happen. It still might, but nothing particularly suggests why it would. As the Institute for Fiscal Studies pointed out, they haven't actually changed the GDP growth forecast over the six-year period."

This essentially makes the same point as Tombs, but draws the opposite conclusion.

There is also the fact that less than half of the Government's austerity programme has taken place so far, with the Chancellor last Thursday stretching it out to 2018-19, when it was originally supposed to have ended during this Parliament. These constant cuts are another drag on the economy, albeit the right argues that this will not be a problem if the private sector makes up the difference.

More than ever, the Chancellor will be hoping that the OBR is being more bearish than bullish. If 2014 does not turn out as predicted, it could profoundly affect the outcomes of both the next General Election and the Yes Scotland campaign closer to home.

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