I am worried we are worrying about the wrong things. You know the conventional litany of gloom: how a combination of falling house prices and rising energy costs will undermine consumer spending, leading to a possible recession, which in turn will push up unemployment and slow the economy still further.
Those basic concerns have to remain, as every month that passes with yet another fall in house prices gives more credibility to this outlook. The current snapshot of the economy is one of continuing growth but on a gradually weakening trend. Sectors associated with the housing market have been hard hit: builders and estate agents, of course, but also anyone selling the sort of things people buy when they move home, such as furniture and white goods. There have also been sectors directly hit by the soaring oil price, which brought the business-class airline Silverjet to earth last Friday.
But while conditions in the shops are weaker than they were even three months ago, there is still growth around. I have long felt that 2009 will be a more difficult year than 2008. But now I am wondering if the greatest concerns should be about 2010 and beyond.
In a nutshell, this downturn may be less deep than some people fear – we may indeed escape recession – but it may last much longer, with several years of sub-par growth.
Economists are none too good at predicting economic events a year ahead, let alone three or four. But there are some things that can be said – some pointers to this being a long trudge rather than a sharp shock.
Let's start with some possible good news. There have been several signs in the past few days that the oil price may be topping out. Were it to race on to $200 a barrel and stick around there, that would surely nudge many developed countries into recession. While anything can still happen, there has been a gathering feeling that oil is already in bubble territory. I was intrigued by the graph above on the left, put together by the economics team at Lehman Brothers. It shows what has happened to the oil price over the past eight years and superimposes what happened to the price of shares on Nasdaq, the US technology index, in the eight years prior to its peak in March 2000. If the oil boom were to follow the path of the dot-com boom, we would be back to $60 a barrel or less by the end of next year.
Of course oil and hi-tech shares are very different – you must have energy but you don't have to have hi-tech shares – and the oil, price is likely to be sustained by demand from China and India. But there is a common thread in market behaviour – they invariably overshoot – and the oil market has that feeling to it right now.
If the price of the black stuff does indeed top out soon, that will reduce the danger of a deep, V-shaped recession. But because of the inflation already in the system, there will be less scope for cuts in interest rates in the developed world. You can see the change of mood in the financial markets in the right-hand graph. This shows what they expect to happen to central bank rates in the US, UK and Europe in six months' time. Taking the UK as an example, you can see that back at the end of January, the markets expected that come August, base rates would be one percentage point lower. As it turned out, they did get a quarter per cent drop in February but have had nothing since, and the prospect of a fall by August looks remote. Now it gets even more interesting, for the markets are pricing in a rise in bank base rates by November, not just here but in Europe and America too.
You could say that the markets were wrong before and they may be wrong again. The Bank Credit Analyst group, which produced that chart, thinks central banks will be very reluctant to increase rates this year and does not predict a rise. Others, such as Lehman Brothers, expect cuts in the UK and Europe by the end of the year. This caution seems sensible. But I don't think anyone should rule out the possibility that the next move in rates will be up rather than down, particularly if inflation rises through the summer and autumn.
If an increase in rates here is unlikely (though possible), a rapid decline seems equally unlikely. We could be stuck with base rates roughly where they are now for a couple of years, maybe longer. More alarmingly, it is quite possible that rates will rise further in the long term, and if that happens, the ability of mortgage lenders to hold their own rates down will be very limited, even if base rates fall.
You can see why, under these circumstances, Northern Rock is increasing the number of staff it is putting on to manage the position of borrowers who find it hard to service their debts.
If you are looking for a lead indicator of what might happen here, the obvious place to go is the US, where the housing market is running about 18 months ahead of the UK. Their peak was in May 2006, and prices are now down an average of 16 per cent from that. Yet consumption there is still rising, albeit slowly. Americans are reluctant to tighten their belts, and I expect we will be too. Consumer confidence is down there, as here, but if you look at what people do rather than what they say – well, they keep spending.
Eventually, however, we all have to live within our means. That points to a long period when consumption will have to rise more slowly. I think it could last five years or more – in other words, not just through the rest of this parliament but through most of the next one too. Employment may come down a bit but maybe not too dramatically, and while as a general rule we will keep our jobs, our real earnings will stagnate.
This is not too terrible a prospect: in recent years, the Germans and Japanese have faced greater pressure on their living standards and come through. But it is not a prospect that will delight the Prime Minister, for in large measure Gordon Brown will be held responsible for not getting the country's finances into better shape to withstand such headwinds.
Meanwhile, we as individuals should do what he failed to do and get our own finances in order, ahead of a long haul.
Economists will do no harm, and could do good
Economists do sometimes produce solutions to global problems. I have just been looking at some work by the Copenhagen Consensus Center presented at a conference there last week. It brought together a panel of economists, including five Nobel laureates, to identify the most promising approaches across a range of issues, the idea being to come up with solutions to the world's 10 most serious problems.
You might think that a somewhat ambitious goal and the centre itself is certainly controversial, partly because it is headed by Bjorn Lomborg. He is hated by some people and celebrated by others for his sceptical approach to coping with climate change. The aim of the centre, however, is broader. It is to develop market solutions – as opposed to bureaucratic ones – to the world's problems.
The results are always interesting and often counter-intuitive, and you can catch a taste for that from three papers presented ahead of the meeting. These looked at problems in education, air pollution, and water and sanitation.
On education the key was to focus on why children dropped out, rather than on building schools. The lead author of that study, Peter Orazem of Iowa State University, also high-lighted the accrued advantages of targeting health and nutrition to boost attendance and performance at school, and on paying parents to make sure their children kept up their attendance – a programme that apparently brought huge benefits.
On air pollution, we think of the problem as being the air outside the home. Actually, in less developed countries there is a serious problem about the air indoors. This claims several million lives a year because of the use of old-fashioned cookers that run on solid fuel. Consultant Bjorn Larsen highlighted some cheap, effective ways of combating that.
The third paper looked at how to help the billion people who don't have access to decent water and the 2.5 billion who go without proper sewage services. The world has turned away from large infrastructure projects and the paper did acknowledge that the costs of these have often proved to be higher than the benefits. But there are exceptions: it recommended building large, multi-purpose dams in Africa that would both conserve water and produce hydro-electric power. It also advocated the more fashionable intermediate solutions such as the development of a rural water supply in Africa using boreholes and public hand-pumps.
It always seem to me that the main aim of Western experts working on development issues (and let's consider economists as experts for this exercise) is first to do no harm. It may sound rather arrogant to gather in a beautiful Scandinavian city and think you can solve the world's problems, but at the very least this exercise surely passes the "do not harm" test. There is a lot of common sense here and that is no bad thing either.Reuse content