Classic mid-cycle pause holds dangers for Clarke

At some stage every economic recovery falters; growth slows; the government of the day gets worried; the opposition jeers; and pundits proffer their usual contradictory advice. We are, of course, at that stage now - and we are at it just before the Budget. There is, therefore, a fine opportunity for the Chancellor to move policy in quite the wrong direction, and if he were to do so that, too, would be in line with past experience.

Since the beginning of 1993, it has been slow, quick, slow: we had one year of steady growth, one of sizzling growth, and we are now into the third year of rather slower growth. Since just about every forecaster underestimated the rate of growth last year, and just about everyone over- estimated it this year, no one feels overly confident now.

Last year people under-estimated overall growth largely because they did not spot the growth of exports, particularly to continental Europe; this year they have over-estimated mainly because they did not see the extent to which consumers would trim their spending in the face of increased taxation.

You can see the way in which consumption has not benefited fully from the expansion in the economy by looking at the chart. (The forecasts shown here come from Charterhouse, chosen because it is rather more cautious about growth this year, and more optimistic next than the consensus.) In 1993 consumption ran ahead of growth of GDP, leading the economy out of recession, but last year and this it has been running well behind. Maybe you can explain some of this in terms of the new insecurity that everyone, in jobs or out, seems to feel. But you can equally explain it simply by pointing to the way taxpayers have been hit over the head.

This raises an important question for next year. We know that there will not be any tax increases in the Budget. The reasonable working assumption is that there will be some modest net tax cuts (of which more in a moment). It is, therefore, quite plausible that consumption will rise reasonably briskly next year. A recovery started by consumers, and then subsequently sustained by exports, will then be supported again by consumers.

You can embellish this story a little by expecting a recovery in exports next year, with the US still growing strongly, some recovery from weak growth on the Continent, at last some growth from Japan, and continued rapid growth (though from a small base) in many of the variety of "emerging" economies. Investment will probably be quite good (Charterhouse thinks it will be very strong).

The main cloud is in stockbuilding, or rather the continued running down of stocks. This has been happening very sharply in continental Europe this year as manufacturers over-estimated the growth of demand last year and have had to slice back. But all in all, you can make a very good case for expecting good growth next year.

Conclusion? We are in the classic mid-cycle pause. This is not what many industrialists feel, for they are quite worried by the soft demand they see for their products and services. It is not what politicians feel, for they are beset by worried people in their constituencies. And it is not, to judge by their behaviour, what most consumers feel for they are still very cautious in their spending habits. But it is probably right.

If it is, what are the implications for the Chancellor? There has been an undercurrent of concern during the last month or so, which has surfaced to some extent in the newspapers, that the Chancellor will "give away" too much: that he is about to make a fiscal error by stoking up consumption at just the moment that it was going to bounce back anyway. I really think that is wrong. I think he is in serious danger of making an error, but a different one.

Let's assume that there are indeed pounds 2bn of net tax cuts, maybe a little more. That really is not a big enough number to matter. Take the PSBR down by pounds 10bn - the reduction that actually occurred between 1993/94 and 1994/95 - and people feel it. But a couple of billion is too small a number to have any real impact. True, it is possible to manipulate public spending so that one or other interest group can be made to feel better. Perhaps, too, a budget can affect the mood of people and influence their behaviour that way. But unless the Chancellor heads right outside the span of expected measures, there will be no fiscal mistake next month.

There might, on the other hand, be a monetary mistake. The lags in monetary policy are very long. The Chancellor appears to have got away with his resistance to that rise in base rates that the Bank of England wanted, because world interest rates came off shortly afterwards. The Bank has subsequently dropped the pressure for an early rise. It is quite possible, assuming that the Budget is reasonably well-regarded by the markets, that, come the spring, it will even be possible to engineer one small cut in base rates. The inflation story will appear quite good. The retail price index, both at a headline level and at the underlying rate, will be flattered by electricity price rebates, while wage pressures have been curbed (at least in the private sector) by the slowing of growth this year. And of course lower interest rates would give specific help to the housing sector, something that particularly concerns the present government.

But against this should be set two dangers. One is that consumers will indeed become much more confident next year - that the pause now will be reflected in a sharper jump come the spring. The other is that monetary policy may now be more loose than, say, the housing market or yesterday's money figures suggest - the weak sterling is signalling amber.

The foreign exchanges think that the Chancellor is about to make a mistake, and while they are a deeply unreliable witness, they are worth attention none the less.

Start your day with The Independent, sign up for daily news emails
i100 In this video, the late actor Leonard Nimoy explains how he decided to use the gesture for his character
Robert De Niro has walked off the set of Edge of Darkness
news The Godfather Part II actor has an estimated wealth of over $200m
Arts and Entertainment
Fearne Cotton is leaving Radio 1 after a decade
radio The popular DJ is leaving for 'family and new adventures'
Robbie Savage will not face a driving ban
Life and Style
Nearly half of all young people in middle and high income countries were putting themselves at risk of tinnitus and, in extreme cases, irreversible hearing loss
health Nearly half of all young people in middle and high income countries are at risk of tinnitus
It was only when he left his post Tony Blair's director of communications that Alastair Campbell has published books
people The most notorious spin doctor in UK politics has reinvented himself
ebooksA special investigation by Andy McSmith
Arts and Entertainment
arts + ents
Life and Style
Arts and Entertainment
James Franco and Zachary Quinto in ‘I Am Michael’
filmJustin Kelly's latest film tells the story of a man who 'healed' his homosexuality and turned to God
Arts and Entertainment
Public Service Broadcasting are going it alone
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SThree: HR Benefits Manager

£40000 - £50000 per annum + pro rata: SThree: SThree Group have been well esta...

Recruitment Genius: Office Manager / Financial Services

£30000 - £37000 per annum: Recruitment Genius: Established in 1999, a highly r...

Jemma Gent: Year End Accountant

£250-£300 Day Rate: Jemma Gent: Are you a qualified accountant with strong exp...

Jemma Gent: Management Accountant

£230 - £260 Day Rate: Jemma Gent: Do you want to stamp your footprint in histo...

Day In a Page

HIV pill: Scientists hail discovery of 'game-changer' that cuts the risk of infection among gay men by 86%

Scientists hail daily pill that protects against HIV infection

Breakthrough in battle against global scourge – but will the NHS pay for it?
How we must adjust our lifestyles to nature: Welcome to the 'Anthropocene', the human epoch

Time to play God

Welcome to the 'Anthropocene', the human epoch where we may need to redefine nature itself
MacGyver returns, but with a difference: Handyman hero of classic 1980s TV series to be recast as a woman

MacGyver returns, but with a difference

Handyman hero of classic 1980s TV series to be recast as a woman
Tunnel renaissance: Why cities are hiding roads down in the ground

Tunnel renaissance

Why cities are hiding roads underground
'Backstreet Boys - Show 'Em What You're Made Of': An affectionate look at five middle-aged men

Boys to men

The Backstreet Boys might be middle-aged, married and have dodgy knees, but a heartfelt documentary reveals they’re not going gently into pop’s good night
Crufts 2015: Should foreign dogs be allowed to compete?

Crufts 2015

Should foreign dogs be allowed to compete?
10 best projectors

How to make your home cinema more cinematic: 10 best projectors

Want to recreate the big-screen experience in your sitting room? IndyBest sizes up gadgets to form your film-watching
Manchester City 1 Barcelona 2 player ratings: Luis Suarez? Lionel Messi? Joe Hart? Who was the star man?

Manchester City vs Barcelona player ratings

Luis Suarez? Lionel Messi? Joe Hart? Who was the star man at the Etihad?
Arsenal vs Monaco: Monaco - the making of Gunners' manager Arsene Wenger

Monaco: the making of Wenger

Jack Pitt-Brooke speaks to former players and learns the Frenchman’s man-management has always been one of his best skills
Cricket World Cup 2015: Chris Gayle - the West Indies' enigma lives up to his reputation

Chris Gayle: The West Indies' enigma

Some said the game's eternal rebel was washed up. As ever, he proved he writes the scripts by producing a blistering World Cup innings
In Ukraine a dark world of hybrid warfare and murky loyalties prevails

In Ukraine a dark world of hybrid warfare

This war in the shadows has been going on since the fall of Mr Yanukovych
'Birdman' and 'Bullets Over Broadway': Homage or plagiarism?

Homage or plagiarism?

'Birdman' shares much DNA with Woody Allen's 'Bullets Over Broadway'
Broadchurch ends as damp squib not even David Tennant can revive

A damp squib not even David Tennant can revive

Broadchurch, Series 2 finale, review
A Koi carp breeding pond, wall-mounted iPads and a bathroom with a 'wellness' shower: inside the mansion of Germany's 'Bishop of Bling'

Inside the mansion of Germany's 'Bishop of Bling'

A Koi carp breeding pond, wall-mounted iPads and a bathroom with a 'wellness' shower