LONDON (MarketWatch) — The lines are growing longer at the soup kitchens. Boards are going up on shop-fronts as stores go out of business. The airports are thronging with young people getting out of a country where there is no longer any hope of finding a job. To listen to the warnings from some of the world’s most respected economists that should have been a fairly accurate description of Britain by autumn 2013.

Except for one thing. It hasn’t happened. In fact, the U.K. is doing surprisingly well, with a stronger recovery than just about anyone forecast.

The British bounce-back has confounded the Keynesian consensus, which forecast repeatedly that the austerity program imposed by Prime Minister David Cameron’s coalition government would pitch the country into a deep depression. And it has chalked up a significant victory for those who argue that cutting deficits and controlling debt — so long as it is done in the right way — can promote growth rather than destroy it.

If they are smart, investors are going to pay a lot less attention to those warnings of austerity leading to doom from now on.

The British economy is not exactly booming. But it is at least firing on one cylinder if not two, and there is no question the economy is looking in better shape than it was just a few months ago.

The U.K. gross domestic product grew 0.7% in the second quarter, confounding predictions that austerity would still hamper the economy. MarketWatch

Revised gross domestic product figures last month showed the economy grew by 0.7% in the second quarter of the year, and there are predictions growth could reach 1% for the third quarter. Earlier this month the OECD sharply increased its forecast of growth for the U.K. economy this year to 1.5% from an earlier estimate of 0.8%. Retail sales were up 1.1% over the last month, and house prices are starting to fizz again. Both services and manufacturing are purring along, and jobs are being created in the private sector to compensate for those lost in the public. It is not exactly an economic miracle — but it is a lot better than most people expected at the start of the year.

And it is certainly a lot better than any of the leading Keynesian economists thought possible. Go back a year, and there were frantically warning that Cameron’s austerity program was pushing the country into a slump.

Take Paul Krugman, for example. Speaking at a debate at the London School of Economics last year, the Nobel Prize-winner said that there was a “clear and present risk” austerity policies would damage Britain’s future. In a BBC interview in May last year Krugman attacked the government’s austerity policy as “deeply destructive.”

Britain's Prime Minister David Cameron Reuters

He argued the said the coalition’s plan was “failing dismally,” and instead of cutting spending the government should be increasing it by 2% of GDP.

He was far from alone in that view.

Larry Summers, who until the weekend was one of the leading candidates to become the next chairman of the Federal Reserve, had no more success in calling this one right. “A change in the pace of fiscal consolidation is necessary for Britain to have a chance to avoid a lost decade of economic performance,” he wrote in an article in the Washington Post in September last year. The country’s real problem was a lack of demand — and the only way to fix that, he argued, was with higher government spending.

The big cheeses of the International Monetary Fund took much the same view. In January this year, its chief economist Oliver Blanchard cut the growth forecast for this year to just 1%, and told the BBC in an interview that austerity was being overdone. “We think this would be a good time to take stock,” he said of the government’s spending plans, indicating that the government should loosen up its purse strings, and add a bit more to the national debt.

Admittedly, these are the same geniuses who bought us the Greek “rescue” packages (current youth unemployment rate 57% — which makes you wonder what happens without the “rescue”), but even so that is a spectacular misjudgment.

Of course, you can argue that the U.K. would have done even better if the government had slowed down the pace of austerity. Perhaps output would have recovered a bit faster, and real wages would not have dropped by as much as they have. We will never know for certain.

Time-lapse video shows righting of Costa Concordia

And, in fairness, many of the U.K.’s critics listened to the rhetoric of austerity rather than looking at the actual figures. Measured in real terms, British public spending may be under pressure, but in cash terms the government is spending 4% more this year than last. The deficit is still running at 7.1% of GDP, higher than in France, Spain or even Greece, and is only projected to drop to 6.5% next year. By any historical standards, that is pumping a lot of demand into the economy.

But what you can’t honestly do is argue that austerity — such as it — has prevented the U.K. from returning to growth or caused a fresh slump. Nor can you deny that if the U.K. was running a deficit of say 9% of GDP now — as Krugman, Summers and presumably the IMF’s Blanchard would have liked — it would have to work a lot harder over the next few years to get that back down toward an acceptable long-term rate.

In fact, the interesting lesson from the U.K. is not about whether austerity works or not — but how it can work, if it is done in the right way.

The U.K. mixed a gradual reduction in government spending in real terns with near-zero interest rates, huge blast of quantitative easing, and a sharply depreciated currency. All of that helped to sustain demand when it might otherwise have crumbled — and allowed the U.K. to return to growth, while the euro zone has barely recovered at all.

The Keynesian consensus, which often seems to believe that the level of government spending is all that really matters to an economy, and that economies can’t recover while spending is being cut, has surely been blown out of the water. Smart investors won’t listen to it again.