Clarke's recovery has all the signs of old-fashioned boom
Thursday 15 August 1996
It is easy to spot this tendency by looking down the list of forecasts published each month by the Treasury. The consensus prediction for 1997 is a 3.2 per cent increase in GDP. Only three out of 44 growth forecasts lie more than 0.5 percentage points away from 3.2 per cent in either direction and only eight are more than 0.3 points away.
Yet there is an increasingly strong case that the UK economy is heading for something that looks a lot more like a good old-fashioned boom than a steady, sustainable recovery - and not even a mini-boom but a maxi-boom. The two brave souls who have predictions of 4 per cent growth and above in 1997 - Tim Congdon at Lombard Street Research and Paul Turnbull at Merrill Lynch - are looking increasingly prescient. Unlike most of the others, they have remembered the rule that the economy is never as well behaved as the forecasts.
For proof that booms always come as a surprise, there is no need to look any further back than 1994. In January of that year the consensus forecast was that the economy would expand by 2.5 per cent, driven by consumer spending and investment. All agreed it would be a better year than 1993. As it turned out, growth was actually 4.1 per cent.
The grandaddy of recent booms took place in 1988, of course. The Treasury had one of the highest growth forecasts for the year, at 3 per cent. The actual outturn was a 5 per cent leap in GDP. (The fact that the Treasury team had done better than most other economists did little to preserve it from criticism of its forecasting record, just as the fact that the Bank of England's record on forecasting inflation has been slightly better than average is currently not deflecting the myth that it is unduly pessimistic.)
Economist David Mackie at City investment bank JP Morgan has compared the 1990s with the Maudling boom in the 1960s, the Barber boom in the 1970s and the Lawson boom in the 1980s.
The parallels - hinted at by the charts - make quite a compelling case for suspecting that the Clarke boom is in the making. The common threads are loose monetary and fiscal policy, increasing demand for exports and financial liberalisation. Take macro-economic policy first. Base rates fell 3 percentage points from their peak in 1962-63, 2.5 points in 1971- 72, 2 points in 1985-86.
This time around they have fallen only 1 point from their peak in the preceding 12-18 months.
On the other hand, the Government's tax and spending policy is far more relaxed. The budget deficit ranged between 1.6 and 5.8 per cent of GDP during the Barber boom, and 1.1 and 2.8 per cent under Mr Lawson, as he then was. Mr Clarke's deficits have run at 5.1 per cent of GDP in 1995 and a probable 4.5 per cent this year and 4 per cent next year.
The external environment matters, too. World trade grew rapidly in the early 1960s and early 70s. In the mid-1980s export markets were more subdued but a fall in the pound before Britain joined the exchange rate mechanism improved competitiveness. There is no question but that exports have weakened significantly along with the slowdown in key markets such as Germany. But most forecasters expect them to pick up next year. The consensus has export growth rising from 4.5 per cent this year to 5.6 per cent next.
On the face of it there is little comparison with the financial deregulation that took place during the earlier episodes. Hire purchase restrictions were lifted in the early Sixties, boosting sales of consumer durables. This was when many households got their televisions and vacuum cleaners. The next decade brought the end of direct controls on bank lending. In the 1980s indirect controls on lending and direct foreign exchange controls were ended, and building societies' lending became less restricted.
However, there is an equivalent move now with the conversion of many of the building societies into banks. Not only will they have more freedom over their loans policy, it is putting pounds 16bn (at Mr Mackie's latest estimate) directly into the hands of consumers. This will take the form of shares but will be easily saleable. If only half of it is spent, it will add nearly 2 per cent to consumer spending.
Some commentators have argued that the money - along with maturing Tessas and the interest on them - will not be spent because people treat wealth windfalls differently from income windfalls. There is something in this, but many also regard spending money on consumer durables as different from spending on food or clothes. It is a fair bet a chunk of the windfall money will show up in consumer spending, used to buy dishwashers, computers and new cars.
With all the conditions in place, the evidence of an impending boom is building up.
Retail sales and consumer expenditure have started to accelerate, helped along by this year's tax cuts, the biggest one-off boost to spending power since the late 1980s. Only a few idealists believe there will be no further income tax cuts in November's Budget. Low mortgage rates have set house prices rising at an annualised rate of 10 per cent on average across the country and far more in parts of London and the South-east. Unemployment continues its trend decline and businesses have started to report skill shortages. Even Britain's forlorn manufacturing sector is edging towards a recovery.
It will not be long before all the classic signs of economic froth such as gazumping, mini-skirts and new electronic accessories make a reappearance.
Of course, the world might be different this time around. We might be set for the "Clarke steady recovery" rather than the "Clarke boom". But to count on it would be to forget British economic history - as most of the economic forecasters seem to be doing.
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