News that the UK economy shrank at the end of 2010 came as a shock to everyone hoping for a sustained, strong recovery. And while the Chancellor appeared to blame the snow, one sector is still performing well: the online economy.

Just look at online shopping – the latest IMRG Capgemini e-Retail Sales Index shows that online sales in January 2011 were up significantly on January 2010. So, does the digital economy have the potential to generate wider economic growth in the years ahead?

What is the digital economy?

Encompassing everything from online shopping to video game design and more, the term ‘digital economy’ is a little vague. According to one report, it’s worth £100bn, which would make it the fifth largest industry in the country if it were treated as a separate sector.

Indeed, David Cameron endorsed the digital economy last year, with a trip to east London’s ‘Silicon Roundabout’. And while this could be viewed as opportunistic (is it true that sensible governments only pledge to support something only once they’re pretty sure it’s going to be a success?), it does at least demonstrate that the people in charge know what the internet is.

Maybe Tom Steinberg’s excellent 2009 observations about how the government doesn’t get it aren’t quite as applicable today.

Where do we go from here?

So, is the digital economy well placed to really kick-start the wider UK economy? In January I attended an interesting debate at TechHub, a new space for start-up companies also situated in east London.

The topics covered there were wide-ranging, but they touched on four elements that need to be present for the UK’s digital economy to really power ahead:

Security. From headline-making cyber-terrorism to run of the mill online crimes like identity theft and fraud, it’s vital people feel safe online. It’s not only the role of government to do that, so we need legislators, enforcement agencies and business to pull together so people feel confident on the internet.

Law. There was a lot of controversy over the Digital Economy Act when it was introduced and at the TechHub debate it was clear people are still concerned. Even though the Act is now law, discussions about how it should be interpreted seem to be ongoing – giving some hope to those worried.

Investment. As The Economist says, entrepreneurs “agree that the main barrier to growth is the scarcity of investment.” Access to bank finance is still a problem, but the government has pledged a £200m fund for businesses with “high-growth potential”. Where does that leave viable start-ups that plan to grow more slowly?

Infrastructure. In a country where many of us still rely on broadband delivered over copper wires that were laid before the internet even existed, we need faster, more reliable connections. Sitting at 24th in the world broadband speed league simply isn’t going to cut it.

Is the digital economy all it’s cracked up to be, or do we need to look elsewhere for an economic boost? Leave a comment and let us know your thoughts.