David Prosser: And the solution to our economic woes is... there is no solution

Outlook: 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

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.

Start your day with The Independent, sign up for daily news emails
PROMOTED VIDEO
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

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

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Client Services Manager - Relationship Management - London

£30000 - £32000 per annum + benefits : Ashdown Group: A highly successful, int...

Recruitment Genius: Credit Controller / Customer Service

£18000 - £20000 per annum: Recruitment Genius: This rapidly expanding business...

Guru Careers: In-House / Internal Recruiter

£25 - 28k + Bonus: Guru Careers: An In-house / Internal Recruiter is needed to...

Recruitment Genius: Tax Assistant

Negotiable: Recruitment Genius: A Tax Assistant is required to join a leading ...

Day In a Page

Syria crisis: Celebrities call on David Cameron to take more refugees as one young mother tells of torture by Assad regime

Celebrities call on David Cameron to take more Syrian refugees

One young mother tells of torture by Assad regime
The enemy within: People who hear voices in their heads are being encouraged to talk back – with promising results

The enemy within

People who hear voices in their heads are being encouraged to talk back
'In Auschwitz you got used to anything'

'In Auschwitz you got used to anything'

Survivors of the Nazi concentration camp remember its horror, 70 years on
Autumn/winter menswear 2015: The uniforms that make up modern life come to the fore

Autumn/winter menswear 2015

The uniforms that make up modern life come to the fore
'I'm gay, and plan to fight military homophobia'

'I'm gay, and plan to fight military homophobia'

Army general planning to come out
Iraq invasion 2003: The bloody warnings six wise men gave to Tony Blair as he prepared to launch poorly planned campaign

What the six wise men told Tony Blair

Months before the invasion of Iraq in 2003, experts sought to warn the PM about his plans. Here, four of them recall that day
25 years of The Independent on Sunday: The stories, the writers and the changes over the last quarter of a century

25 years of The Independent on Sunday

The stories, the writers and the changes over the last quarter of a century
Homeless Veterans appeal: 'Really caring is a dangerous emotion in this kind of work'

Homeless Veterans appeal

As head of The Soldiers' Charity, Martin Rutledge has to temper compassion with realism. He tells Chris Green how his Army career prepared him
Wu-Tang Clan and The Sexual Objects offer fans a chance to own the only copies of their latest albums

Smash hit go under the hammer

It's nice to pick up a new record once in a while, but the purchasers of two latest releases can go a step further - by buying the only copy
Geeks who rocked the world: Documentary looks back at origins of the computer-games industry

The geeks who rocked the world

A new documentary looks back at origins of the computer-games industry
Belle & Sebastian interview: Stuart Murdoch reveals how the band is taking a new direction

Belle & Sebastian is taking a new direction

Twenty years ago, Belle & Sebastian was a fey indie band from Glasgow. It still is – except today, as prime mover Stuart Murdoch admits, it has a global cult following, from Hollywood to South Korea
America: Land of the free, home of the political dynasty

America: Land of the free, home of the political dynasty

These days in the US things are pretty much stuck where they are, both in politics and society at large, says Rupert Cornwell
A graphic history of US civil rights – in comic book form

A graphic history of US civil rights – in comic book form

A veteran of the Fifties campaigns is inspiring a new generation of activists
Winston Churchill: the enigma of a British hero

Winston Churchill: the enigma of a British hero

A C Benson called him 'a horrid little fellow', George Orwell would have shot him, but what a giant he seems now, says DJ Taylor
Growing mussels: Precious freshwater shellfish are thriving in a unique green project

Growing mussels

Precious freshwater shellfish are thriving in a unique green project