Anyone feeling a little depressed about returning to work after a long weekend today ought to think twice before reading a new paper from Dr Tim Morgan, who is the global head of research at the inter-dealer broker Tullett Prebon. Its prognosis for Britain's economy is far more gloomy than, say, the modest trimming of growth forecasts announced yesterday by the British Chambers of Commerce.
Dr Morgan's analysis argues that two things have produced most of the growth in Britain over the past decade: public spending and private borrowing. So much so, he says, that sectors of the economy now dependent on one or other of these now account for at least 58 per cent of output – and probably more. Think, for example, property and financial services when it comes to borrowing, or health and education for spending. For construction, think both.
Here's the problem: when more than half the economy depends on two drivers, it's difficult to see how there can be growth if those two drivers are weakening. That, of course, is what is happening right now. Public spending cutbacks have only just begun, while there is no sign at all that borrowing in the private sector is increasing. Both individuals and corporates are continuing to deleverage – if anything they are now doing so at a faster rate than last year.
It gets worse. Dr Morgan says that in addition to the 58 per cent of the economy that will find it impossible to grow in the current climate, the retail sector, responsible for a further 11 per cent of output, will not be able to produce any growth either because consumers' disposable incomes are set to fall over the next 12 months and beyond.
At best, on this analysis, the UK will be fortunate to avoid a double dip recession over the next few quarters. Dr Morgan has a pretty brutal phrase to describe the Chancellor's projection that the UK will be seeing economic growth of 2.8 per cent a year in two years' time. He describes it as a "mathematical implausibility".
If that's right, the consequences are more serious than a spot of embarrassment for George Osborne – the Government's growth forecasts underpin its deficit reduction plan. Or as Dr Morgan puts it, "without growth, there may be no way of avoiding a debt disaster".
Don't think this is a tacit endorsement of Labour's alternative agenda, which one might describe as deficit reduction-lite. Simply cutting spending a little more slowly isn't going to solve the problem of more than two-thirds of the economy consisting of sectors with moribund growth prospects. Plan B will, in other words, land us in the same place as Plan A.
So what's Dr Morgan's suggestion? Well, as the title of the paper rather suggests – the headline is: "No way out? Why the British economy is in very deep trouble" – he doesn't have one. His argument is that we are now paying the price for those years when we conned ourselves into thinking our economic growth was sustainable, rather than based on ever more borrowing and ever higher spending – and that it is a price which must be paid. I told you not to read it if you were feeling down.
Lagarde's guile may win or lose her US backing
Should Christine Lagarde manage to win the support of the US in her bid for the managing director's job at the International Monetary Fund she will be almost home and dry – the EU and the US account for 48 per cent of the votes between them. It's fascinating, then, to hear what US Treasury Secretary Timothy Geithner has to say about Ms Lagarde's candidacy. Full of praise for her he may be, but a formal endorsement has not yet been forthcoming.
It may well be so in the end, of course, but it would certainly be interesting to know how Mr Geithner feels about the French finance minister in the context of the run-in he has had with her over the past year. The two have repeatedly crossed swords over the European Union's plans for tighter regulation of hedge funds – and though it may not be obvious to the wider world just yet, the industry's insiders say Mr Geithner has come off decidedly the worse.
The US got itself pretty worked up about the EU's first drafts of new regulation for the hedge fund industry. Not without reason – the initial proposals would effectively have barred American hedge funds from selling to European investors. Over time, however, following a series of protests from Mr Geithner and interventions from Ms Lagarde, a compromise was adopted – and the directive incorporating this agreement was finally signed last Friday.
At first sight, it looks as if Mr Geithner has come up with the goods on behalf of his country's hedge fund sector. A passport system will enable non-EU hedge funds to operate within the EU providing they have been given the all-clear by their regulators back home.
But while that appears to solve American hedge funds' problems, there's a little more to it than that. The directive also requires that funds must get a declaration from their domestic regulator that they comply with all of the EU's rules for its own hedge fund sector, on everything from gearing to managers' pay. The Securities and Exchange Commission in the US is already pointing out, not unreasonably, that Congress does not award it funds so that it can spend its time checking the American financial services sector complies with foreign laws. In any case, many US hedge funds will be deeply unhappy about some of the requirements in the EU.
Ms Lagarde has outmanoeuvered her American opposite number. The question now is whether Mr Geithner will be irritated into thinking twice about supporting her for the IMF job, or so impressed by her guile that he is actually more inclined to offer American endorsement.