Britain’s economy is finally off the interest rate life-support brought in nearly 10 years ago after the financial crisis struck.
But experts warn “deep scars” left by the recession has made the UK vulnerable to new shocks.
When the Bank of England pushed the button on its milestone interest rate rise last November, it marked the first hike since July 2007, when Gordon Brown had just taken over as prime minister and markets were blissfully unaware of the financial crisis brewing.
Now following the second increase to 0.75% this August, rates are at last above the emergency low of 0.5% where they had languished since the Bank’s dramatic cut in March 2009 to contain the fall-out from the crisis.
But does this mean the economy is back to normal?
Most economists and even the Bank Governor Mark Carney himself have been quick to stress that, while fairly resilient, Britain’s economy is now merely trundling along at a “new, lower speed limit”.
Official data showing unemployment at a 43-year low masks the long-lasting effects that the crisis and subsequent recession has had on the economy.
“It’s clear that 10 years on, the recession has left deep scars on the labour market and average family real incomes,” according to Chris Williamson, chief business economist at HIS Markit.
“The long-term damage is evident in the sheer scale at which the economy has failed to catch up for lost growth,” he said.
The recession that followed the credit crunch and financial crisis saw output plummet by more than 6%, as it began shrinking in the second quarter of 2008 and continued to contract until the third quarter of 2009.
It took five years for the economy to get back to the size it was before the recession and in the aftermath, unemployment reached its highest rate since 1995, with almost 2.7 million people looking for work by the end of 2011.
The Office for National Statistics (ONS) calculated in April that the economy is now around 11% bigger than it was before the recession.
But it is far behind where it would have been if the crisis and recession had not happened.
Mr Williamson said: “It’s likely that the economy is around 15% smaller than it would have been if a recession had been avoided. This is growth that has been lost forever.”
And while unemployment returned to its pre-downturn rate at the end of 2015, earnings have failed to keep up with inflation, with only a brief period of respite in recent months.
The UK’s so-called labour productivity – how much money each worker adds to the economy – also slumped in 2008 as the recession struck and has not recovered since.
Some of this may also be down to a fundamental change in the labour market, given the rise in the “gig” economy as the likes of ride-hailing service Uber have increased temporary, freelance workforces.
But as experts have been left scratching their heads over how to resolve the “productivity puzzle”, they have come to the conclusion that UK growth – at 0.4% in the latest quarter – is limited to a “new normal”.
Laith Khalaf at Hargreaves Lansdown said: “In today’s economic climate, 0.4% quarterly growth draws a small cheer from the crowd, though it would have been deemed below par prior to the financial crisis.
“In the 10 years running up to the crisis, UK economic growth averaged 0.73% per quarter.”
Where once rate hikes would have signalled a booming economy that needs be reined in, the last two increases are taking place when activity is expanding relatively slowly.
Mr Williamson said: “It would be wrong to believe that the raising interest rates means we are back to normal.
“In fact there is a ‘new normal’ which means that, due to the drop in productivity and other structural changes to the economy – such as reduced immigration – the economy cannot grow as fast as it used to without inflation rearing its head.”
Related: Chancellor says no deal Brexit will damage UK GDP for years to come
So while the tenth anniversary of the financial crisis sees the economy now in a very different place from the dark days of 2008-2009, it has been left with challenges and the ever-present threat of new risks emerging, not least the Brexit deadline and global trade wars.
Philip Shaw, an economist at Investec, said Britain has also been left in a weakened state.
“In many ways, the economy is less resilient than it was pre-crisis. There’s less room to stimulate monetary policy,” he warned.
At 0.75%, the Bank has little to offer this time around in terms of rate cuts to ward off the threat of another recession – a risk that has become all too real as Brexit talks flounder.
Mr Williamson said it hangs in the balance: “A bad deal, with high tariffs and non-tariff barriers for example, is unlikely to be one that the economy fares well against, and could lead to another recession. However, a good deal could see the economy regain strength.”
The Government has at least got its own finances to a more stable position to withstand wider shocks.
Borrowing is forecast to fall to £37.1 billion this financial year – far below the heady days after the crisis, when it had at one stage spiralled as high as £151.7 billion in 2009-10.
This should give a little comfort amid the Brexit anxiety, according to Mr Shaw.
“We will get through this,” he said. “We’re in a much better space than we were 10 years ago.
“And at least I’m not waking up in a cold sweat any more,” he added.
Source: Shropshire Star