David Blanchflower: George Osborne is set to make a sad state of affairs much worse with his lunatic plan

 

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The Independent Online

“We don’t export enough; we don’t train enough; we don’t save enough; we don’t invest enough; we don’t manufacture enough; we certainly don’t build enough; and far too much of the economic activity in our nation is concentrated here in the centre of London.” Presumably the Coalition Government must take some of the blame for that? Of course not; silly me for being so daft for thinking such a thing; all Gordon Brown’s doing, of course.

The quote was taken from the Chancellor of the Exchequer’s Mansion House speech last week, where he made clear that none of this of course was his fault. Over the last five years there has been no significant improvement in training, exports, saving, house-building, manufacturing or investment, and the north-south regional divide has increased. The search for scapegoats once again is on. Osborne in fact has to bear most of the blame for this sad state of affairs; he has done nothing and is now set to make matters much worse with his lunatic plan for more austerity. Down, down we go.

Let’s start with manufacturing and production illustrated in the first chart. Recall Osborne in 2010 promised that we were going to see a march of the makers. The data shows that didn’t happen. Industrial production and manufacturing output today are both still lower than at the onset of recession. Most worrying, though, is that industrial production is lower today than it was in Q2 2010, when the Coalition took office. Manufacturing output increased by only 0.2 per cent on the year. In the three months to April 2015, the UK’s deficit on trade in goods and services was estimated to have been £7.2bn, widening by £1.6bn from the three months to January 2015. In the three months to April 2015, the trade in goods deficit widened by £1bn to £30bn. We clearly don’t manufacture or export enough, mostly due to Osborne’s totally inept economic policies.

Plus there is more unneeded austerity nonsense on the way. The worry is that the economy is already slowing. The majority of the scores on business conditions of the Bank of England’s agents are down sharply from last spring. Important evidence on that front comes from the latest qualitative data from the European Commission for the UK. As can be seen from the second chart, consumer confidence took a major hit in the recession. The consumer confidence index is measured as a balance, so a bigger negative number is worse. Confidence rose steadily from a low in January 2009 of minus 35 and then rose steadily through 2010. Once the Coalition took office and imposed austerity and claimed the UK was comparable to Greece and Spain and bankrupt, animal spirits collapsed. The same story also applies to the main business indicators that the EU collects: retail, industry, services and construction all followed an identical path down. Austerity last time around killed confidence stone dead. The concern is that the same thing is occurring once again. Animal spirits are already looking rather dispirited.

In May 2015 the consumer confidence index plummeted, by 6 points, back to the level last seen in January 2014. Was this down to a fear of austerity and what was to come, or perhaps down to the possibility of a Labour government? That remains unclear, although we should note that the survey was taken from 1-19 May, so half the interview period was post-election. Of particular concern is that the two forward-looking components of the index plunged especially sharply. They are respondents’ views on their financial situation over the next 12 months and the general economic situation over the next 12 months. The latter was down 10 points on the month, which is the biggest monthly fall since 2002. We did not see such a large drop even in 2008 and 2009, when output was falling through the floor.

 

The previous two biggest monthly drops in the last five years, of minus 7.9 points in May 2010 and minus 8.9 in July 2010, came as Osborne became Chancellor last time and his warnings of austerity to come depressed animal spirits. The economy flatlined for three years, killing off the growth he inherited from Labour. The economy was growing at 1 per cent in Q2 2010 compared with 0.3 per cent presently. As made clear by the European statistical agency, Eurostat, the UK economy is the joint 15th fastest growing European economy, behind: Denmark (0.4 per cent); the Netherlands (0.4 per cent); Portugal (0.4 per cent); Sweden (0.4 per cent); France (0.6 per cent); Hungary (0.8 per cent); Slovenia (0.8 per cent); Slovakia (0.8 per cent); Bulgaria (0.9 per cent); Spain (0.9 per cent); Poland (1.0 per cent); Cyprus (1.6 per cent); Romania (1.6 per cent); and the Czech Republic in top place growing 3.1 per cent in the first quarter alone. This may be a blip, but it may not be. In 2010 Cameron and Osborne sneered that the UK was bankrupt and like Spain; today Spain is growing three times faster than the UK with Slasher at the economic tiller for the previous five years. This doesn’t look good.

It does seem that over the last seven years or so, spikes in these timely confidence indicators, including the Bank of England agents’ scores, have given us a pretty good idea when we are at a turning point. These surveys turned early in 2008 prior to the downturn, and turned up early in 2009 when the uptick occurred. They also gave an early indication of a rise in activity in the spring of 2013. They suggest that the economy turned down in the spring of 2014. One of my graduating Dartmouth seniors, Yannick Yu, did a very nice senior thesis on the predictive power of these surveys, where he showed these qualitative surveys are pretty good indicators a year ahead on changes in the unemployment rate. So this tick down may imply a rise in the unemployment rate to follow later this year.

In the Mansion House speech, Slasher Osborne set out the details of his political stunt of legislating for a budget surplus, which may be good politics to trap the Labour Party but it is terrible economics. The only reason that the UK grew post-2012 was because Slasher became more flexible and abandoned austerity.

As one of my Twitter followers suggested, “It’s like saying I won’t ever use the reverse gear or 4th gear when driving”. Why would you do that unless the car was broken?

It probably is.

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