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Analysis: In Britain, economic recovery increases PM Cameron's political capital

Britain's Prime Minister David Cameron listens to a question during a news conference at Number 10 Downing Street in London March 14, 2013.
Britain's Prime Minister David Cameron listens to a question during a news conference at Number 10 Downing Street in London March 14, 2013.

By Guy Faulconbridge and Andrew Osborn

LONDON (Reuters) - British Prime Minister David Cameron may be close to pulling off one of the most significant feats of his premiership: delivering a solid economic recovery ahead of a 2015 election.

Two consecutive quarters of growth have shifted the sands of British politics: six months ago, lawmakers in his ruling Conservative party warned him that failure to lead Britain out of stagnation could cost him, and them, the election. Those fearful voices have fallen silent.

After cutting Britain's biggest budget deficit since World War Two by a third, Cameron leads what could be the fastest growing major economy in the European Union this year.

"Will the better economic data change the political landscape? Well, economics is the biggest issue," said Steven Bell, director of multi-asset investment at F&C Asset Management which has about 98 billion pounds ($151.52 billion) under management.

"Having pursued a policy of austerity, the government will get credibility both for prudent management and for the recovery," said Bell. "They will get the credit for this."

Britain's $2.5 trillion economy grew by 0.6 percent in the second quarter after a 0.3 percent rise in the first quarter, putting it on course to grow by at least 1.4 percent this year.

That would be the strongest annual growth since 2010, the year Cameron forced Labour's Gordon Brown from office by forming a coalition government with the Liberal Democrats after no party won an outright majority in a general election.

Some investors say Cameron's policies may in fact be partly to blame for the recovery's long wait. But they still expect the government to benefit.

"The recovery could have happened a lot sooner with a bit more government support for infrastructure spending in particular," said Trevor Greetham, asset allocation director for Fidelity's Investment Solution Group, who has responsibility for $14 billion of assets.

"But that is not the way things tend to work in the minds of the electorate - you cannot say 'well actually this would have happened earlier and we would all be a lot wealthier with a policy that didn't happen'. In reality it is the strength of the economy at the time of an election that tends to matter most."

For Cameron and his finance minister, George Osborne, the political gamble was always on economic growth. But even as signs emerge that their bet may be paying off, they remain cautious.

Party sources say they are acutely aware of the risk of premature triumphalism 21 months before the election.

When asked on almost a daily basis whether Britain is seeing "the green shoots of recovery", Cameron's spokesman says only that the economy "is healing" or "out of intensive care". He always stresses that tough times still lie ahead.

IT'S THE ECONOMY STUPID

Staking their reputation on reducing Britain's debt mountain and nursing the economy back to health, Cameron and Osborne knew they had just a few years to make inroads into what they said was the profligate legacy of the 1997-2010 Labour governments.

But as the economy stagnated, Britain's two most powerful men were branded "dipsticks" by Rupert Murdoch's Sun newspaper and their privileged backgrounds - both went to expensive schools and were members of the same exclusive high-society dining club at Oxford - were mocked.

One outspoken Conservative lawmaker even called them "arrogant posh boys" who "don't know the price of milk".

Cameron's party lost ground in opinion polls and was convulsed by internal rebellions over Britain's ties with the European Union and over gay marriage, while the opposition Labour party warned voters austerity was killing off the recovery.

But from services and consumer spending to house prices, Britons' best loved measure of economic virility, data now shows the world's sixth largest economy may be about to do better than at any time since the onset of the 2007-2008 financial crisis.

Under its new governor, Mark Carney, the Bank of England upgraded its mean growth projection this month by 0.8 percentage points to 2.5 percent in 2014. If achieved, that would be Britain's fastest annual growth rate since 2007.

"A renewed recovery is now underway in the United Kingdom, and it appears to be broadening," Carney said at his first news conference as Bank of England chief while unveiling a promise -- with caveats -- not to raise interest rates above 0.5 percent until unemployment falls below 7 percent.

While a recovery is underway, the economy is a long way from regaining its pre-crisis strength. Britain remains vulnerable to any more shocks from the euro zone debt crisis and voters' incomes are at some of their lowest levels in a decade.

Yet ultra-loose monetary policy, support for the housing market, the potential of North Sea oil production, and the ability to ease the pain of austerity with tax revenues give Cameron one of the best economic backdrops of his premiership.

If he can keep the recovery on track right up to the next election, Cameron's chances of winning - possibly even the Conservatives' first outright victory since 1992 - increase.

If he wins, Cameron has promised an in-out referendum on Britain's membership of the European Union by the end of 2017. Economic growth could ease voter unease at immigration - one of the drivers of anti-European Union feeling in Britain.

LABOUR

Growth leaves the opposition Labour Party and its leader, Ed Miliband, in a tough spot. Labour's drive to convince voters it can run the economy has fallen flat so far: support for Conservative economic management soared to 40 percent from 28 percent in June, according to a Guardian/ICM poll.

The poll put Labour's overall support at 35 percent, a mere three percentage points higher than the Conservatives. Labour's lead was 12 percentage points in the same poll in February.

Now it is Miliband and Labour finance chief Ed Balls, rather than Cameron and Osborne, who are mocked by the domestic press.

After a protester threw an egg at Miliband's head during a visit to an East London market in August, the Sun branded him "Scrambled Ed" and cast him in a cartoon as the broken-egg character from the English nursery rhyme Humpty Dumpty.

But Labour says improving economic data shows no signs of translating into higher living standards.

"It may be a recovery for those at the top, but it is not a recovery for most people," a senior Labour source told Reuters. "For most, living standards are being squeezed as inflation outstrips wages more and more. This is what we're going to be pointing out."

In a change of tack, Miliband has put the cost of living at the heart of his economic policy, noting rising costs for everything from utilities to train fares.

He plans to attack Cameron with the slogan: "They're out of touch. You're out of pocket." ($1 = 0.6468 British pounds)

(Editing by Peter Graff)

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