Hamish McRae: The slowdown is here and it won't go away, but there's no need to jump out the window

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The Independent Online

There is the chill of autumn in the air. Four bits of evidence have emerged in the past few days of the sudden slowdown that has struck the British economy.

At the start of the week, Gordon Brown admitted growth would miss his own pre-election forecast of 3 to 3.5 per cent, and that it would be closer to 2 per cent. The new GDP figures also came out, revealing that over the year to end-June, the economy had grown by only 1.5 per cent. Meanwhile, the CBI's survey of retailers' sales expectations for October was the worst since the series began 22 years ago. And on Friday the consumer confidence index for September fell, with higher petrol prices and other concerns offsetting any boost from the August cut in interest rates.

Gulp. This is clearly time for a bit of perspective. The first point to be clear on is that it would be amazing were there not some slowdown in the economy, given the surge in energy prices and the topping-out of the housing market. The surprising thing is that the Treasury forecast failed to acknowledge this. So missing a forecast does not in itself matter if the forecast was a duff one in the first place.

Even growth of 2 per cent this year is not going to happen, for it is not realistic to expect a sudden speeding-up during the rest of the year. The various City forecasters are pencilling in 1.5 to 1.8 per cent - better than most of the eurozone but poor by the standards of the past decade.

You can see the shape of the long boom since the early-1990s recession in the left-hand graph above. There was pretty steady growth through the mid-1990s, a bit of a peak around 2000, then somewhat more subdued growth until another peak last year. Now there is a clear slowdown.

Several points emerge. The first is that once expansion was established there was a seamless transition from the Tories to Labour in terms of the rate of growth. A second point is that it is to Mr Brown's credit that the country avoided a more serious dip in 2001-02 - unlike the US, Japan, Germany and several smaller economies. That was the result of strong counter-cyclical fiscal and monetary policy. A third is that this slowdown had started to bite even before the rise in oil prices this spring. Finally, in contrast to the early 1990s, the economy is still growing.

The second graph shows what is happening on the high street. I was talking with some retailers last week and the general message was that while the slowdown started around 18 months ago, it is only since the spring that it has become alarming. That fits in with the picture here. It shows actual retail sales - just inching forward on an annual basis - plus whether retailers expect sales to go up or down, as reported to the CBI. They have been fitted together neatly by the economics team at Barclays Capital.

So things are bad, but how bad? The Barclays team makes the interesting point that other indicators are healthy: earnings are strong, mortgage approvals are up and the housing market has stabilised.

So things are not really as bad as at any time for 22 years.

That feels a sensible assessment. Things cannot be as dire as they were in the early 1990s; they are just worse than they have been in the recent memory of retailers.

Still, flat retail sales will cast a pall over the economy. It is not just the business community that will feel ground down; we consumers must also feel a bit depressed or we would be spending more money. Instead we have started to rebuild our savings: the savings ratio has recovered quite sharply in the past couple of months.

What looks like happening is a period, maybe quite a long one, of relatively subdued growth. Hardly anyone is predicting outright recession. But equally the idea that the economy will grow swiftly for the next couple of years is for the birds. What we are going through is a mid-cycle pause.

What is so bad about that? Well, nothing, except that this is not what our Chancellor has plugged into his spending plans. Slower growth will, other things being equal, mean lower tax revenues and, as unemployment creeps up, higher welfare spending. As a result, government borrowing this year is running at an even higher level than it was last year, which in turn was higher than the year before, which in turn ... yes. Instead of the budget deficit coming back below 3 per cent of GDP, as it is supposed to, it will again be above that level.

True, all major governments are borrowing at a similar or higher rate, but this does not alter the fact that sooner or later all of them, including our own, will have to cut back. That means higher taxation and/or lower spending. Already the Government plans to increase the proportion of GDP collected in taxes, though maybe not the actual tax rates. But all this is predicated on growth that seems unlikely to be achieved.

Even so, no one should jump out of the window because growth is going to be 1.7 per cent this year or the budget deficit will turn out to be 3.5 per cent of GDP. They are not good figures but they are not awful. The worry is that at this stage of the economic cycle, the Government ought to be piling on surpluses - as Mr Brown did in the late 1990s - so as to be in a position to drive through the next global downturn.

In relative terms, the UK still has several pluses. It has lost some ground in terms of its international competitiveness, according to surveys, and public sector productivity is falling rapidly, according to figures out last week. But is still attracts more inward investment than any other country bar the US. (Some figures last week showed that in 2004 we passed China for inward investment.)

We have a balance of payments deficit but that is running at around 2 per cent of GDP, which is acceptable, unlike the 6 per cent in the US. And we have reasonable growth, unlike Italy and Germany.

So the big point is not that things are terrible. Rather it is that the good times, with unemployment falling and consumption rising by 4 per cent or more a year, are over for the time being. That little clutch of bad news during the past week is saying simply there will be a period of belt-tightening ahead. How tight? We will catch some indication in the pre-Budget report, due in late November, but may have to wait until the next Budget to be more sure. Meanwhile, the modest silver lining to these clouds will be another fall in interest rates, which retailers and estate agents will hope comes pretty soon.

Turkey's numbers don't add up for the EU

Turkey has every right to be angry with the European Union. This has been a long courtship graced by a certain lack of frankness on both sides. But now it is clear that, whatever happens at the talks this weekend, Turkey will not become a full EU member. Nor, given the political realities in France, Germany and Austria, was that ever going to happen.

The numbers don't work. Turkey's present population is 71.3 million, making it the second-largest member were it to join, after Germany's 82.5 million. Since its birth rate is well above replacement rate and Germany's well below, Turkey would soon become the most populous member, with presumably a voting power that reflected that. The median age of Turkey's population is 26, whereas in Germany it is 42.

Meanwhile, there is a huge disparity in wealth and economic development. GDP per head is just $3,340, which compares with an average of $26,750 for the eurozone. Turkey still has 36 per cent of its workforce in agriculture, compared with 4.5 per cent. It has been growing at 2.7 per cent a year between 1993 and 2003, against 2.1 per cent for the eurozone. But that is not particularly fast: the UK grew at 2.8 per cent, and Eastern Europe has done better still. Poland over the same period grew by 4.9 per cent a year, Hungary by 3.5 per cent. Allow for population growth and the numbers are worse.

So in economic terms Turkey does not bring much to the party. Besides, its present free trade status enables it to be a very successful exporter to the EU. More than half its exports go there. In one sense it has the best of both worlds, with access to the market without the bureau- cratic hassles that full EU status involves. Membership would not involve large handouts, as the newest tranche of members have found. Indeed, from an economic perspective, the idea of a special partnership - which Turkey has rejected even as a possibility - would be the ideal option. So this is a political thing, not economic.

What will happen? The danger is that an economic relationship that has worked pretty well up to now will become more fractious. It need not. What Turkey needs to do is to slog on with economic reforms, in particular running a developed world monetary policy. Its inflation rate between 1999 and 2004 averaged 36.4 per cent a year. Whatever the politics, in economic terms that number should be enough to clinch it.

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