City & Business: It's looking worse than the last recession

Click to follow
The Independent Online
GIVE Gordon a break. On 3 November, the Chancellor of the Exchequer forecast the economy would grow no less than 1 per cent in 1999. On Tuesday, the OECD forecast it would grow 0.8 per cent. Since then, a whole raft of businessmen, economists, and politicians led by the Prime Minister himself in his Mansion House speech have come out of the woodwork to suggest that Gordon Brown is looking through rose-coloured spectacles.

This is unfair - like trying to pick the winner in a numbers game by waiting to see the numbers before you pick. The second-guessers are leaving Gordon exposed on the numbers, while taking cover behind his core thesis: yes, we're in for a hard winter, yes, the economy will weaken in 1999. But, yes also, it will bottom out in the second half of next year and rebound in 2000.

Why? Because, the Chancellor says, under New Labour (with a little unacknowledged help from John Major) state finances are in crackerjack shape compared with their condition on the lip of the 1990-1992 recession. Remember the Lawson boom? Low taxes and modest interest rates left the Government's arsenal of economic policies depleted just when the Government needed them to prime the economic pump. Today, in contrast, the Government is not in economic disarray. It has, as New Labour's mantra goes, behaved prudently. Mr Brown has the leeway to stick to his spending plans and borrow to paper over any budgetary black holes that open. Increased borrowing could weaken sterling. But a weaker pound would be welcome to export manufacturers.

That is the Chancellor's core thesis. Those who want to seriously criticise him must criticise it rather than the possibility he has got his 1999 economic forecast fractionally wrong. That's not what most businessmen, economists, and politicians are doing. But it is what I want to do. Yes, Britain's finances are in better shape in 1998 than they were in 1990. Unfortunately, however, that doesn't matter very much. The next 12 to 24 months are going to be worse than 1990 - 1992.

Why? Because of what's going on outside the UK. The global economic outlook in 1998 is significantly worse than in 1990. If it's not, then why did Alan Greenspan, chairman of the US Federal Reserve, cut interest rates last week in the face of good third-quarter growth figures and a stock market rebound?

In 1990, we were still basking in the glow of 1989 - the annus mirabilis during which Communism collapsed. The post-Gulf War New World Order was crystallising into something called "globalisation". An elite corp of global bond traders were just getting the bit between their teeth - funnelling capital into emerging market economies with high growth prospects.

In 1998, the collapse of Communism translates into depression in Russia. Globalisation is not invalidated, but economic development in emerging markets, courtesy of industrial world capital, is proving a more uncertain process than it seemed before it was tested.

In 1998, too, one of the other engines of the Nineties boom is spluttering. "Corporate restructuring" or "downsizing" or "delayering" was a process meant to boost growth by making the industrial world's major corporations more efficient. Today that process looks played out. Indeed, it's beginning to look counter-productive.

Everyone long ago sussed that corporate restructuring translated into job losses. What people are beginning to suss now is that these job losses will not be offset by new jobs in new technology industries - at least not within a three- to five-year time-frame.

In 1989, as Robert Samuelson pointed out in the Washington Post last week, Thailand had no steam cracking plants for making petrochemicals. Now it has three. In 1995, the world's polypropylene plants - associated with steam cracking - were producing at 94 per cent capacity. Now they are producing at 79 per cent capacity.

Too many goods, too few people with too little money to buy them. This is a recipe for deflation. Deflation brings trade wars. Bananas, slots at Heathrow or steel, as Andy Marshall spells out below - take your pick. Globalisation and corporate restructuring put a neat intellectual gloss on the Nineties boom. It remains to be seen what resonance the terms acquire in the recession ahead.

Globalisation is an American invention. In recent years, it has been used as shorthand to describe a process of opening up emerging market economies to the beneficial winds of democracy and free trade. But there was always a fuzziness to the term. It was also shorthand for the extension in the reach of Wall Street investment banks and Fortune 500 industrial companies.

The European Union is attempting to counter the dark side of globalisation through the euro and other forms of economic integration. But the dark side of globalisation is going to get darker as America gears up for its presidential election in 2000. The centre of gravity in American political dialogue is lurching unpleasantly in favour of the isolationists.

The prospect of hard times ahead - worse than 1990-1992, not better - raises the question anew of where the financial markets are headed. Yesterday's splash in the FT was "Rally on world stock markets picks up speed." You can read good news into this: "Share prices soar as fears of global economic slowdown ease," as the FT said. Or you can start worrying that the financial crisis of mid-August until October might turn out to be a harbinger of things to come.

NO ONE should - or will - take this Cassandra-like blathering at face value. It's a point of view and no more - just like economic forecasts are points of view distilled through the medium of a semi-scientific discipline.

The way the economy actually works is infinitely more complex and surprising. For evidence, read the e-mail I received last week from Dominic Prince:

"Joe Lewis, the billionaire Bahamas-based foreign exchange speculator, is selling. Not sterling, but one of his more obscure business interests - Phoenix Prop Hire, located on the distinctly unglamorous Park Royal Industrial Estate in west London. Phoenix is in the business of renting out props to film and theatre companies. The purchaser, rather appropriately, is the Peter Pan of the television industry, Michael Green, of Carlton Communications.

"Lewis has long been fascinated with prop hire companies, but the pressures of forex trading recently apparently persuaded him to do away with this hobby. The business is rumoured to have notched up some pretty hefty losses and, perhaps fearing that he had lost his Midas touch, he decided to unload.

"Not before calling in various experts from Christie's, however, where he also had a hefty stake until selling that this year for an estimated pounds 50m profit. What Lewis wanted to know was whether there were any pieces of furniture or paintings among the tat that should be kept back from the sale. You know the type of thing - it happens every week on the Antiques Roadshow.

"Sadly for Lewis, this story does not have a happy ending. There was nothing in the vaults of any value. The company passed into the ownership of Green goods untouched."

Comments