Hamish McRae: They do less and they do it better. Weak leaders are good for our financial health

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The Independent Online

So we're going to have weak government too. And that's great.

One of the most notable features of the developed world is that all the largest economies are now run by weak governments. That is self-evident in the US, though just how weak will depend on the mid-term elections in November. In Japan, Junichiro Koizumi is a lame duck as he is expected to step down as Prime Minister in September. In Germany and Italy, the results of the most recent elections were so close that the new governments of Angela Merkel and Romano Prodi are unable to do anything radical. And in France, scandal and riots have sapped the power of both President Jacques Chirac and Prime Minister Dominique de Villepin.

Now Britain joins the club. Others will be better at explaining the intricacies of the Cabinet reshuffle or the implications for the PM's succession, but from an economic perspective, we now have a Government that will not want to take risks; it will have to try to behave in a more competent way and that precludes grandiose initiatives that fall to bits. And that is what is so welcome. For economies to build and retain prosperity requires competent and predictable governance, rather than ideological politicians who think they can change the world.

You can demonstrate this at a macroeconomic level. The long boom started here under the government of John Major after the famous ejection of sterling from the European Exchange Rate Mechanism. His humiliated administration had to be disciplined and cautious. As a result, it set in place the monetary framework that formed the basis for the independent Bank of England introduced under Labour. When Gordon Brown became Chancellor, he too was cautious, creating fiscal rules that would make it difficult for a future chancellor to permit the same excesses as the Tories did in the 1980s with the Lawson boom.

Then, gradually, Labour became overconfident, leading to the waste of public money and the incompetent administration that is now being punished by voters. But over the past few months, just as the Blair/Brown government's popularity has declined, there seems to have been some modest recovery in business confidence - as the first graph, from the economics team at American Express, shows. This plots the purchasing managers' index for both manufacturing and services and the latter is close to a new high.

You can trace similar trends in other countries, particularly on the Continent. In Germany the government of Gerhard Schröder was an economic catastrophe, yet he was a popular and effective politician. Had Ms Merkel managed to form a majority government, she might have introduced radical restructuring policies, which, however helpful in the medium term, would have been damaging in the short. In Italy, the period in office of the dominant Silvio Berlusconi was an economic disaster. And in France, many of the most destructive policies have been brought in under ostensibly strong governments.

Now, with weak government, core Europe is looking up. As you can see in the middle graph, eurozone business confidence is rising, and if the relationship between confidence and output holds, core Europe could have a rather better period of growth ahead. ING, commenting on this, notes that German construction confidence is now improving at the fastest rate for 20 years. It acknowledges that the country is doing better than Italy but points out that growth can take place despite structural weakness.

In the case of the US, the link between a strong economy and a weak administration is more tenuous. President Bill Clinton presided over the 1990s boom but that had run its course by the end of his tenure. There has been a reasonable recovery under George Bush, who has arguably been a weak leader. The third graph shows pretty stable growth through this period, despite a recent wobble in confidence. Maybe, with the President becoming still weaker, the recovery will last another couple of years.

As for Japan, well, there has been the long-awaited recovery of the past three years. But whether that should be associated with a (relatively) strong prime minister is another matter. Maybe Japan is the exception.

What happens next as far as our own economy is concerned? In the past few days, the mood has changed. Instead of the main worry being a slow-down in growth, it has become one of a speed-up.

There are several bits of evidence here. One is the rise in services (and to some extent manufacturing) confidence evident in the left-hand graph. Another is a turn-up in the housing market, with prices now clearly increasing again. Retail sales are a bit less gloomy too. And employment seems to be climbing again, though so too is unemployment - maybe a result of the expansion of the workforce after migration from the new EU member states. We will also benefit a bit from the rise in demand in Europe and maybe from some modest depreciation of sterling against the euro.

As a result, the broad expectation now is that the next move in UK interest rates, instead of the being down, will be up. That won't happen until the autumn, though, and in any case there is always a danger of some external shock. The contrast between confident financial markets and concerned global politics remains as stark as ever.

That is the background to what is really quite a substantially modified government. There is no change at Number 11, of course, but the concerns about competence that led to the election reverses, and hence the scale of the reshuffle, extend to the work of the Treasury and its plan to expand spending so rapidly on a basically unreformed NHS. In private, Mr Brown would dismiss concerns about falling productivity in the NHS, even when these became evident. The Treasury has also repeatedly missed its revenue targets, which smacks of poor planning.

As a result, the pressure on the Home Office and the NHS to get it right instead of getting it wrong will extend to the Treasury. It is already having to row back on some of the technical changes proposed in the Budget.

So, with luck, we will have a period of calmer government. And the calmer government is, the easier it is for the rest of us to plan. Whether it will become more competent, we will have to wait and see, for the instinct to set yet more targets seems deep-rooted - and excessive reliance on targets is one of the things that has gone wrong.

But the notion of a government that does fewer things but better is an attractive one. If that is what weak government will mean in practice then let's have more of it.

Time to trim fuel bills - or change cars?

I was talking oil a couple of weeks ago with someone who runs an energy-intensive business. I was pondering the possibility of $100-plus oil and his response was that this would be better, in a way, than the present upward creep. His argument was that a sudden surge would enable his firm to pass through the cost to customers as it was clearly something it could not absorb itself. Creeping rises were more of a problem.

Well, last week the oil price still hovered around $75 a barrel, while the world economy continued to live with what, in money terms, is its highest-ever price.

The practical question for us at the pumps is pretty much the same as that facing the business community. Do we try to trim our fuel bills by making small modifications - by trying to drive less, say - or do we take the plunge and think about changing the car? If we knew the price of a litre of petrol was going to be £1.50 then we would buy a Prius or one of those French diesels. If it is going just to creep up, the decision is harder.

Everyone is now pretty aware that this oil price squeeze is different from the previous ones in that supply is not being artificially restrained by Opec and demand, particularly from China, is rising fast. So the price is less likely to fall back dramatically.

I have looked at some detailed production figures and they do seem to suggest that the oil industry is stuck at present production levels. Saudi Arabia is still on 9.5 million barrels a day, as it has been for the past two years. Russia has managed to ramp up its operations to the same level, briefly passing Saudi in January to become the world's largest producer. But it has now fallen back a bit. Other big producers are struggling. Indeed Dr Stuart Staniford, writing on the website theoildrum.com, points out that no Opec producer has increased its output since September. Meanwhile, demand is likely to carry on increasing.

Conclusion? A situation of flat supply and rising demand does suggest that the present price is unlikely to fall and a spike is always possible. Time to think about downsizing the car?