Anthony Hilton's Week: Why are we trying to beat an economy which was fuelled by debt?
Saturday 26 January 2013
There is no reason to be pleased with the growth figures which were announced on Friday, but we do need to keep a sense of proportion – a decline of 0.3 per cent is a small amount on a very large number.
Consider this. There are roughly 250 working days in the year in which we produce our annual output, so 1 per cent of Britain's gross domestic product is produced in just two and a half days or 20 working hours at eight hour per day. This means that 0.1 per cent of output is produced in just two hours, so the 0.3 per cent decline in the figures published yesterday was the equivalent of six hours of output.
So if you are worried about a triple-dip recession work through lunchtime for a week.
There is a more serious point. While no one likes the current growth figures, the bigger concern is how long it is taking to get back to the peak we were at before the 2008 bust. Looked at in these terms the recovery is slower than any for which we have decent data.
This, however, is illogical. The boom leading up to 2008 was largely fuelled by the nation taking on more debt than it could afford. Some of what seemed like growth was an illusion, froth paid for with debt. It follows therefore that the debt-fuelled peak output of 2008 was not a real number but an illusory or at least an unsustainable one. If that is the case why are we beating ourselves up because we have "failed" to get back to that level. We were never properly there in the first place.
If you strip out from the earlier boom the element caused by debt, you get a growth path and peak which is obviously lower than the official numbers. Plot our current performance against this and it does not look too bad.
We do not expect honest athletes to beat those whose performance is enhanced by drugs. Why should we expect our economy to do better than one powered by the drug of debt?
Betting on City property is a pretty big gamble
Another batch of figures this week showed there is more foreign money pouring into the UK for investment in property than ever before, and most of it seems to be going into offices in or near the City of London.
About 14 months ago a British property firm, Development Securities sponsored a study called Who Owns the City. It showed that for the first time, more than half the prime real estate in the Square Mile was in foreign hands. Mostly the buyers were not rich tycoons from points east – though there are some – but American, German and other financial institutions.
As a result, the price of City real estate has risen – with the odd setback – for the last 30 years. During this time rents have dropped by about 50 per cent. This means values have become increasingly detached from the underlying income – or indeed underlying reality.
That is not the only worry. We had a huge boom in international finance and now we have the bust, so a bet on City property is a wager that the good times will return for international finance and it will continue to be based on London.
The buyers are mainly international-financial investors. They are buying buildings tenanted by other international-financial firms. The business of these is to develop and sell financial products and provide services to other financial firms. So the whole bet on City property is a gamble by financial firms that their own privileged life will continue – whether or not Britain stays in the EU, the euro survives, Asia produces its own financial centres or the fact that societies round the world think banking has got too big for its boots.
That is a pretty big bet – even with other people's money.
Thames Water's tunnel vision is impressive
The highlight of the week was a trip down London's sewers, to see at first hand the network built by Sir Joseph Bazalgette in the 1860s and which still forms the backbone of the system today.
Then out to Beckton to visit the new tunnel being drilled towards Stratford as part of the massive upgrade planned by Thames Water. It is needed to stop the near weekly discharges of raw sewage into the river, which result from the Victorian system operating at twice its designed capacity and therefore being unable to cope when it rains for any length of time.
Two things stand out. The first is the quality of Sir Joseph's Victorian brickwork after 160 years surpasses anything you see above ground. Hose off the muck and it would look like it was built yesterday.
Second is the sheer size of the new tunnel, now just under a mile into its four-mile drive towards the Olympic Park. When this is joined to the planned Thames Tideway tunnel which will run under the river from west London, the whole will rival a bore of the Channel Tunnel in being more than 20 miles long and almost as wide.
Thames Water still has opponents who say the tunnel shouldn't be built, could be done cheaper, should not attract public funds or should be built somewhere else. But so did Sir Joseph. He had seven plans turned down before MPs finally agreed to provide some of the money – and they only did that after they were forced to abandon the Houses of Parliament by the smell from the river.
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