"The fundamentals of our economy are the strongest they have been in a generation." So said Tony Blair in his speech to the CBI Conference last week. "The plain fact is that the British Economy has been transformed". Tony Blair again? No, Nigel Lawson in 1988. "... Employment is high – the highest of any major EU nation". That was Tony Blair last week. "In Britain today, we have more people in work than ever before in our history". Nigel Lawson, this time in his 1989 Budget speech.
Politicians have every right to extol the virtues of the economy, in bad times as well as good. We, as members of the public, have good reason to question these supposed virtues. After all, if the UK is in such great shape today, why is it that the Bank of England slashed rates by half a per cent last week? Why is it that the CBI's measure of business optimism collapsed to recessionary lows the week before? Why is it that companies are struggling to make money and, at least in some industries, have been forced to lay off workers?
Well, there's a simple answer to all of that. The UK, like every other economy, is subject to the ebb and flow of the global business cycle. The UK, being a small, open economy with strong links to the US, is bound to get itself in a bit of bother when times are tough on the other side of the Atlantic. But, underneath this little cyclical difficulty, so the argument goes, there can be no doubt that the UK is fitter, leaner, quicker and keener. This time, the mystery of underlying strong and sustainable economic growth really has been discovered. It's just a shame all our previous prime ministers and chancellors weren't let into the secret.
Mind you, it didn't stop them from believing it. Look back to some of the comments made by earlier chancellors. In 1963, Reginald Maudling announced that "the theme of this budget is expansion: expansion without inflation, expansion that can be sustained". Then, in 1972, we had the rather more ambitious aims of Anthony Barber: "This is our purpose: to achieve a rate of growth twice as fast as in the past decade." The general rule seems to be that successive politicians think they have discovered the hidden elixir of higher growth, or stronger fundamentals, or whatever is the appropriate buzz phrase, and each time successive politicians turn out to be wrong.
So is there any evidence of a transformation? Are our fundamentals stronger than they have been in a generation? And, even if they are, does this tell us anything about what will happen in the future?
Let's begin with economic growth. Are we doing any better than before? The answer really depends on your time horizon. If you take five-year chunks, the latest numbers don't look too bad. In the five years to 2000, UK GDP growth averaged 2.8 per cent a year. That compares with just 1.8 per cent a year in the five years to 1995. Mind you, the UK's done better in the past. The five years to 1990, for example, saw GDP expanding at an average rate of 3.3 per cent a year.
The problem with these comparisons, however, is that some five year periods incorporate upswings while others include recessions. Looking at growth over 10 year periods helps to smooth out some of these bumps. On that basis, the UK's transformation really came through in the 1980s. Growth in that decade averaged 2.7 per cent a year, up from a sorry 1.9 per cent a year in the 1970s. In the 1990s, growth fell back to average just 2.3 per cent a year. If there is something to crow about, it's the UK's performance relative to other countries. In the 1990s, the UK outperformed Germany, France and Japan in terms of economic growth – perhaps more a reflection of failure elsewhere than of specific UK success.
On inflation, the news is a lot better. The inflation rate over the past 10 years has averaged just 3.1 per cent, lower than the averages seen in the 1960s, 1970s and 1980s. From that perspective, there clearly has been a dramatic change which, hopefully, will be improved upon by a Bank of England free of political interference. Then again, inflation hasn't just come down in the UK. Across the Atlantic and across the Channel, central bankers can also afford to feel smug about their success on price stability. The unemployment rate is also very low, although not yet back to the halcyon days of 1960s-style full employment.
Government borrowing? Well, we know that this is – and always has been – a game of swings and roundabouts. Fiscal surpluses come along from time to time but they go away pretty quickly with the advent of recession. The numbers look very good at the moment and, on the basis of a soft landing for the UK economy over the next few months, will remain pretty healthy, even if the Chancellor does provide further give-aways later this month. However, the best-laid plans of mice and chancellors do have a nasty habit of coming unstuck during unexpected downswings.
How about interest rates? It's difficult to know whether the Government should receive any credit at all. Having made the Bank of England independent, it seems as though the credit should be given to the Old Lady, even if the decision on independence was inspired in the first place. Nevertheless, base rates are at their lowest level since the early 1960s – and mortgage rates at their lowest since 1955 – so that seems like very good news.
The trouble with all these arguments, though, is that they don't quite fit together as well as they might. The growth comparisons are backward looking. They tell you what the economy has achieved, rather than what it will achieve. The inflation numbers are also primarily backward looking, telling us mainly about past successes. The fiscal numbers only look good if you assume that growth holds up and recession is avoided. And interest rates are low precisely because recession is a very real threat. Moreover, good fundamentals provide absolutely no guarantee that you will avoid future difficulties: the US has just been through a period of fast growth, low inflation, fiscal surplus and, more recently, interest rate cuts yet it's now in recession. Economics just isn't that simple.
Ultimately, the fundamental position of the economy will be the strongest in a generation only if the Bank of England and global conditions combine to prevent the UK from heading into recession. And we simply don't know yet whether that really will be the case. Certainly, it cannot easily be inferred by the experience of the past five years. As yet, there's no way of telling whether Messrs Blair and Brown have really been transformers of our economy. No doubt, they're hoping for "A Perfect Day". But, at this moment, there's still a real danger of a "Walk on the Wild Side".
Stephen King is managing director of economics at HSBC.Reuse content