As Europe Economy Stumbles, Britain 0ffers Hesitant Hope

Construction cranes are scattered through the skyline in London's financial district. A booming residential and commercial property market has helped bolster growth in Britain. By KATRIN BENNHOLD August 15, 2014

LONDON — Britain, once described as the "sick man of Europe," now looks like the region's bright spot.

Buoyed in part by stimulus efforts, Britain has been showing healthy gains in recent months, a nascent rebound highlighted by the latest economic revisions on Friday. Its improving fortunes call further attention to the new weakness in the eurozone, which is again flirting with the prospect of recession.

The situation shows the tenuous nature of the European recovery, which has been punctuated by successes and setbacks.

Such divergence was on display in the second quarter.

The eurozone stumbled; Germany's gross domestic product contracted 0.2 percent over the first quarter, according to data released on Thursday. The French economy, the second-largest in the 18-member bloc, stagnated.

By comparison, Britain's showed resilience, increasing 0.8 percent in the second quarter, according to the updated data released on Friday. On a year-over-year basis, its G.D.P. rose 3.2 percent, up slightly from the preliminary estimate of 3.1 percent published last month.

Even so, Britain's economy remains in a shaky position — like that of much of Europe.

Britain has grown faster mainly because of a combination of cheap money, an easing in austerity measures and a booming — some say overheating — property market. Core economic sectors like manufacturing, though, have recently lost steam. And exports could be hurt by the rising value of the pound, up 10 percent from a year ago.

It has also been playing catch-up. Britain's economy reached its precrisis levels only in the second quarter of this year, while Germany and France hit that mark three years ago.

"Basically the U.K. is growing faster than the core eurozone countries after doing very, very poorly over the past seven years," Robert Wood, an analyst at Berenberg Bank, said. "This is by no means an amazing economic achievement."

The environment presents a conundrum for British policy makers.

If they keep credit cheap for much longer, they risk stoking a bubble. But if they take their foot off the stimulus peddle too soon, demand might collapse and with it the recovery.

Bolstering the housing market and people's ability to buy homes they could otherwise not afford has been one way for the conservative government of Prime Minister David Cameron to lift the construction sector and fuel a recovery. Its so-called Help-to-Buy program offers first-time buyers interest-free credit or guarantees part of the property loan.

But such efforts have also contributed to skyrocketing home prices. House prices were up 10 percent year on year in June and were nearly twice that in London.

After gross mortgage lending surged 17 percent over the 12 months through June, Mr. Carney hinted in July that higher rates might be needed to cool the market. But he has not budged and most analysts predict the bank will keep interest rates at their 0.5 percent low through early next year.

That's because the recovery has been schizophrenic. Although unemployment has fallen to levels unthinkable a year ago — it currently stands at 6.4 percent — that has not translated into higher productivity or wages.

Pay for workers in Britain is expected to grow just 1.25 percent in 2014, at half the pace predicted as recently as May, and below the rate of inflation of about 2 percent. And for the best part of five years, Britain has recorded no growth in productivity — a measure of G.D.P. per hour worked. The Bank of England is projecting productivity to increase about 0.25 percent this year and 1.75 percent in 2016.

Mark J. Carney, the governor of the Bank of England, said at a news conference this week that a "sustained expansion here at home will ultimately require growth in productivity and real incomes, both of which have disappointed."

Adding to the skittish mood is a jumpy business establishment. Confidence among bosses fell between the second and third quarters of 2014, according to data collected by the Institute of Chartered Accountants in England and Wales and Grant Thornton, a professional services company.

A big wild card for Britain is how the slowdown in the eurozone and the fallout from the crisis in Ukraine affects the economy in coming months.

Economists say tensions in Ukraine and sanctions against Russia may hurt Britain somewhat less than its European neighbors. Britain has fewer business links there than countries like Germany, particularly in the energy sector targeted by the sanctions.

But there are likely to be ripple effects, as Britain's trading partners in Europe are hit. Warning that the sanctions will be felt at home, the British foreign secretary, Philip Hammond, said recently, "You can't make an omelet without breaking eggs."

The uncertainty already appears to be taking a toll. British manufacturing, for example, lost steam in the second quarter, rising just 0.2 percent from April through June, its slowest pace in more than a year.

"The U.K. domestic economy looks good. It's growing strongly and is likely to keep growing strongly," Mr. Wood of Berenberg said. "But an economic powerhouse in Europe it is not."

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