Ballsy is not a word that readily comes to mind when you think of the Bank of England. Yet some of the members of its Monetary Policy Committee have been remarkably outspoken of late. The Governor himself, Mervyn King, told us a couple of weeks ago that we're in for a "difficult and painful year", though his choice of the phrase "broadly flat" to describe the prospects for growth was a little euphemistic.
Perhaps he was trying to avoid being blamed for "talking ourselves into recession" or somesuch; perhaps he was trying to be helpful to ministers, who must wince every time they hear the R-word. Still, we took his meaning – recession on the way. His fresh Deputy Governor for Monetary Policy, Charlie Bean, followed up with a view that the slowdown may "drag on for some considerable time" – refreshingly frank, if not cheery.
However, the prize for the biggest cojones in central banking circles must go to David Blanchflower, admittedly an external member of the MPC, but something of a phenomenon. Obviously driven half mad by the stultifying atmosphere of the committee's proceedings, Mr Blanchflower has become apocalyptic. Every week that goes by, you have to agree, brings more news that backs his pessimism.
Mr Blanchflower says that we are in recession already – strongly indicated by the nil growth recorded in the second quarter – that unemployment will hit two million by Christmas, and that house prices will decline by 30 per cent before all this is over. He's a bit frustrated by his MPC colleagues: "I feel a weight on my shoulders. I feel that things I have been fearful about have come to pass, and I have actually been pretty accurate in what's coming and I have failed to convince the others of what is appropriate." The prophet outcast, it seems. He wants cuts in interest rates. He wants them big. He wants them now. He does not believe that the depreciation in sterling we've seen in recent weeks will rescue us from recession.
Mr Blanchflower may well be right about the inability of the exchange rate and trade to transform matters, but it certainly helps. There are two stories here. First, the short-term one, which is the new-found strength of the dollar, especially against sterling. The dollar has enjoyed an approximate 10 per cent appreciation since its nadir in March, with most of the strength coming in the past month. The reasons? Optimism about America, which went through an Indian summer of 3.3 per cent annualised growth in the second quarter, and pessimism about interest rates in the UK. Analysts universally expect the Bank to leave rates on hold when the MPC meets this Thursday, but have priced in a cut in November, after the inflation spike is safely over, and more aggressive reductions through 2009. Lower yields on sterling means a lower demand for the currency, hence the dollar's bounce. All those downbeat noises emanating from the Bank are doing the trick.
The upshot is that British exporters into the US are going to have some relief. In the medium to long term – the dollar has been very weak against sterling. It's on an index basis, and in real terms, so it takes into account changes in price levels. On a trade-weighted basis, ie taking all our trading partners and their currencies into account, much the same picture emerges: surprising sterling strength against all but the euro.
Even though the dollar has been buoyant in recent weeks, since 2004 it has seen a real depreciation of more than 20 per cent. Anyone who has taken a shopping or business trip to the States over the past couple of years can attest to the bonus they've enjoyed thanks to the strong pound/weak dollar. It has encouraged us to buy American stuff, and made the job of our exporters more challenging. That we are now perhaps seeing the first change in that trend is cause for celebration. Trade with the US is much less important than with our European neighbours (see pie chart), but every little bit helps, especially if other currencies such as the yen and the yuan move in sympathy with the greenback.
The second piece of good news concerns the 54 per cent of trade we undertake with the eurozone. When it was launched in 1999, the euro was, in the indelicate phrase of one forex trader, a "toilet currency". Look where it is now: 50 per cent higher than the low point in 2001; the reserve currency of the future. Again, that has been good news for our exporters. Of course, the looming recession in the eurozone, with negative growth already recorded in Germany, France and Italy, will blunt the export drive (by which I also mean the substitution of UK-made goods and services for imports, which has actually been the more prominent aspect of the improvement in our trading fortunes). And whether the euro will sustain its relative strength is the crucial question. It is difficult to see it going much higher – reaching £1 to €1, say. In which case, the boost from the European side of things, though important, may not be as strong as we might hope.
What we need is a generalised slump in sterling's value abroad. But isn't a weaker pound bad for inflation? Yes and no. First, as Mr Blanchflower points out, the domestic slowdown will see inflation "plummet like a stone" next year, in any case, so that the impact on prices might be relatively subdued. Second, the commodities price boom seems to be over, anyway, another helpful, countervailing influence. Third, a degree of depreciation-induced inflation will help cut the real wage, restrain the rise in unemployment and play to the UK's abiding economic strength – its flexible labour market (ie there isn't much chance of workers clawing the loss back through industrial militancy). So things may easily turn out to be as bad as Mr Blanchflower says, and for as long as Mr Bean says, and as painful as Mr King says, but if you're selling abroad, the recession may not feel quite so awful as it will for everyone else.
It takes an impending recession to turn drivers into eco-warriors
One of the ways of telling whether a recession is coming is simply to time your journey to work (that is if you drive and if you still have work to go to). I can well recall the early stages of the last recession, in around 1990, and how mysteriously thinner the traffic seemed to become. It is happening again. According to the RAC Foundation, congestion on Britain's motorways and major trunk roads fell by 12 per cent in the first six months of this year compared with the first half of 2007. The northern section of the M25 and the M6 are particular beneficiaries, apparently.
Part of that, of course, is down to the large increase in the cost of fuel, and the switch to public transport is confirmed by the boom in business at Stagecoach and other bus and train companies. Suddenly, one of New Labour's forgotten promises – to get people out of their cars and on to public transport – is being fulfilled, though not, of course, in the way that ministers would have intended. Cycling, too, is obviously enjoying a continuing vogue, no doubt encouraged by the success of Team GB's Olympic cyclists. Recession is good for the planet.
So does all this prove the Greens right? Sadly, I think it does, though I don't think they'll ever win the argument. Restraining economic growth is obviously the surest way of reducing congestion, carbon dioxide emissions and global warming. I feel quite confident that the "planetary crisis" that Al Gore referred to again at the Obama coronation last week will be considerably defused when – not if – the Chinese economy stumbles. Even in the US, where "gas" has reached the "shocking" price of about £2 a gallon, drivers are moving away from their SUVs and into more sensible sedans. This week, by the way, Honda will announce a new petrol-electric hybrid to challenge the Toyota Prius, a small but important example of how capitalist competition can push the boundaries of technology forward for the good of all. Though misguided, the switch to biofuels – a policy endorsed by Obama – also symbolises a change in mentality. Green things are happening, spurred on by the harder economic times.
However, we all know, don't we, that as soon as the economy picks up again, and the price of fuel subsides (as it is already at the wholesale end), we will be back to our old tricks. The urge to become more prosperous – and enjoy the fruits of hard work, such as a nice car – is an irrepressible part of the human condition, as has most recently been pointed out by Richard Parry-Jones. Mr Parry-Jones is a former Ford Motor executive and one of the brightest minds in the auto industry. He has been appointed an adviser to the Government, and has warned ministers off attempts to "unfairly demonise" motorists. He is right about that. But – short of recession – how exactly do we stop the roads getting clogged up?Reuse content