Hamish McRae: Don't let the storm clouds of recession rain on your holiday

Despite the gloomy headlines, the British economy can weather the difficult period ahead
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The Independent Online

How safe is your job? In the States there are reports of people not wanting to take holidays in case they return and find their job has gone, but Britons seem to have no such fears.

You can see why. The papers may be full of stories of redundancies and many of us know of people who are being laid off. But there is nothing showing through in the figures yet. Unemployment actually fell in July by 12,800, while vacancies rose by 17,100. Presumably it is because we are not worried about our jobs that we are still spending hard: retail sales rose 0.6 per cent in July, up 6 per cent year-on-year.

So there is a strange disconnection between what you read in the papers and what seems to be happening in the real world. To some, that may seem a common state of affairs – those of us who work on newspapers are well aware of our lapses – but in this instance there are at least three good reasons for the disconnection.

The first is that headlines of job losses, cut-backs and so on are reporting what is happening to big companies, while the majority of us work for smaller ones or for the Government. Big companies inevitably grab the headlines, particularly when they declare thousands of people redundant. Small ones, who are still hiring, do not; and government jobs are added gradually across the land rather than in lumps in specific locations, so they too are not widely reported.

The second reason is that the big firms are the first to move and it takes a while for the knock-on effects to take place. There is a natural progression in the economic cycle from large companies making investment goods (for example, the telecom equipment manufacturers) to companies making big ticket consumer goods (like cars), through to the myriad companies in the service sector (pubs, taxis, etc).

And third, figures on the economy inevitably reflect what has happened in the immediate past, while newspaper stories are usually about companies' plans, reflecting what is going to happen in the near future.

But if it is easy to explain the contrast between gloomy stories and strong figures, it is hard to know how to interpret this dissonance. One obvious conclusion might be that we are living in cloud-cuckoo land, spending madly despite the looming threat of a world recession. No recession please, we're British.

There is an alternative conclusion, which is that British consumers (or holidaymakers) are behaving completely rationally. While there will at some stage be a rise in unemployment, most of those who lose jobs will find others fairly swiftly. While the UK will, of course, be affected by what happens in the rest of the world, we may weather any slowdown quite well.

There must be a bit of truth in both conclusions, but which is more right? Have a look at the graphs above. The left-hand one shows two things. One is that we have cut our household savings down to around 4 per cent, their late-1980s level. The other is that there is a long-term trend in Britain towards consuming a higher proportion of our output: over 65 per cent now against under 60 per cent a decade ago.

The savings figures do support the "cloud-cuckoo" interpretation in that there is an obvious suggestion that at some stage we will need to pull in our horns. Historically 10 per cent would seem a more normal level than 4 per cent, though the disappearance of inflation may encourage us to save less.

On the other hand, the spending figures may well be sustainable. We consume more proportionately than most of continental Europe, but less than the US. In any case, there are no hard and fast rules about the proportion of national income that should be consumed. True, the rhetoric of this Government is that investment (the main alternative to consumption) is A Good Thing. But it is only good if the money is well spent. If you blow it on things that are useless, as Japan has with much of its public works programme, and we did with the Dome, better to consume the money and have a good time.

By you cannot have a good time for long if you are about to lose your job. Is that likely to happen? This depends on the job. The middle graph shows what has been happening to employment over the past 20 years. Manufacturing, as you can see, has fallen in two bouts, the first in the recession of the early 1980s and the second in that of the early 1990s. But other types of job have risen. Employment in both general services and the Government has risen slowly but steadily, while jobs in finance and business services have soared.

The obvious conclusion would be that if there is another recession, only people in manufacturing have much to fear. But even that conclusion needs to be seen in the context of employers' intentions (right-hand graph). If you ask companies whether they plan to take on more staff, they say yes – and that applies even in manufacturing at the moment, not just in services.

So which wins: cloud-cuckoo land or rational confidence?

I think for the moment rational confidence is just ahead on points. There will undoubtedly be a more difficult business climate for the next two or three years. That is much longer than the mainstream forecasters are predicting, but since hardly any of them foresaw the scale of the present slowdown, I don't think we need to take that too seriously. Nevertheless most people will probably be fine through this period until the recovery is established.

But there are serious dangers. For things to be all right we need people to rebuild their savings but to do so slowly. We need the Government to hold its spending steady. We need the freedom to set our own interest rates, which fortunately, unlike the members of the eurozone, we still retain. And if the world economy takes a sudden lurch downwards in the coming months, then maybe this period will seem not like cloud-cuckoo land but like a swan-song summer: the last days of the long boom.

In a funny way I feel less concerned now than a year ago. Then markets were still high, American companies believed that the US boom would never end and those of us who warned that a serious downturn was in sight were ignored or laughed at. Now there is, at a professional level, a much greater sense of reality. The more worried the professionals are, the less worried the rest of us need to be. Let someone else do the worrying and enjoy your holiday.

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