Comment: The corner may have been turned

Click to follow
The Independent Online
It is a fair measure of the low expectations of the professional economy- watchers that the batch of indicators yesterday should be regarded as encouraging. But they are mildly encouraging, for they suggest that a spontaneous recovery has been taking place, despite continued high interest rates and despite a barrage of gloom from many industrialists.

It does not feel like a recovery, partly because it is taking place against a background of disinflation, and partly because it is still extremely fragile. Few people will accept that the economy is growing again until the unemployment figures start to decline, and while there may be the odd freak minus some time during the winter, any sustained decline is not likely until well into next year.

But when the gross domestic product numbers are finally calculated, revised and re-revised, it is probable that the turn of the economy will be seen to have taken place in the second quarter of this year. The small rise in manufacturing production in June, and the upward revisions to April and May, show that manufacturing has been on a slight upward trend for six months. As a result the second-quarter GDP figures will probably be flat, instead of showing another decline as many had feared.

Supporting evidence comes from the car production figures for the first seven months, which are up slightly, and the commercial vehicle production figures for the same period, up by more than 27 per cent. Other small helpful signs come from items like passenger movement through BAA airports, which are back above pre- Gulf conflict levels, and yesterday's comment from Sea Containers on cross-Channel ferry business: traffic is at record levels and the company is looking to an 'excellent' third quarter.

Faint recovery

Of course it is possible that this faint recovery will be crushed by higher interest rates, a decline in export demand if Germany goes into recession, or a further sharp fall in the housing market. The odds on the first must be close to evens while sterling remains at the bottom of the exchange rate mechanism grid.

But whether or not there is some backsliding in the autumn, the fact remains that this recovery will be quite different to any since the 1930s: growth will be accompanied by disinflation. Yesterday's earnings figures, up 6.0 per cent year-on- year, were met with approval as they seemed to show that the wage/price cycle is being broken. But two or three years from now a 6 per cent rise may well seem extremely high: if inflation is down to 1 or 2 per cent, average earnings may only be rising at 3 or 4 per cent.

It was interesting yesterday to see disinflation at work in housing finance: the Halifax, Britain's largest building society, cut rates to savers. This has been presented as an alternative to having to put up rates to borrowers. But one could equally see this as evidence that rates to borrowers are perceived by borrowers as too high: in other words the Halifax is forced to hold down the price of its product - the home loan - in order to attract the business.

The recovery will be different not just because it will take place with stable, or in some cases falling, prices. The balance of spending will be different. In the past British expansions have been consumption-led, with the rise in consumption pushed by a rise in house prices. If houses cease to be seen as investments, and are simply regarded as places to live (as they are on the Continent), then the rise in consumption will take a different form.

Consumers will no longer rush to buy the most expensive property they can afford, then scrimp and save to pay the mortgage and buy things for the house. Their spending patterns may become much more like the rest of Europe: more money will be spent on clothes, on eating out and on other forms of entertainment.

If the changes in company car taxation encourage people to pick cars they would buy with their own money, rather than the ones distributed to them by the fleet manager, then again there will be a shift in consumption patterns. If employees take money instead of a more expensive car, that money is available for other things. The car manufacturers will be discouraged and report that the recovery is very weak. Because economists are accustomed to looking at car sales they too will report that the recovery is weak. But somewhere else the money is being spent. The pattern of recovery may be more accurately reflected in, for example, passenger movements though airports than in car sales.

Solid growth

There is a further reason why reports of growth will be muted, even when solid growth is taking place. This is because companies think in terms of money, rather than units of output. Frequently a company chairman will say that the firm has managed to maintain or increase volume, but only by cutting prices, and this has hit profits. The idea that a firm cannot increase its prices is a novel one to most people running businesses, for they have been able to do so since the 1960s.

On Tuesday the producer price index showed that wholesale prices were up 3.8 per cent year-on-year, the lowest rise since 1968. What will happen from now on is that holding or cutting prices will become the normal condition of business, as it was during the 19th century. (One example, admittedly a special case, of a company facing a rising volume of business but falling money revenues, is BT.)

This is the exact opposite to stagflation, when the financial numbers rose, but the real ones did not. Companies used to boast of increases in profits and turnover when in reality they were standing still; soon they may find themselves reporting relatively flat profits and sluggish turnover, but performing quite well in real terms.

Looking ahead into the autumn, it is important to recognise that the conventional indicators of economic buoyancy, like car sales or house prices, may not give an accurate feel for the way the economy is developing. However, the latest batch of indicators do give some support for the view that the corner has been turned. There are - and will be for several more months - serious worries about the fragility of the recovery. The dreadful social costs of unemployment in all probability will continue to climb, for that rise is unlikely to be reversed for between six and 18 months. But you would not, to listen to industrialists, pick up the fact that manufacturing output has been rising for the past two quarters.

Comments