Economics View: Down on the street, we're steering clear of the world's stresses. But in Whitehall, there's no room for manoeuvre

It's not all bad news – we are still a competitive country and firms are still hiring. But finding the proper policies? Well, that's a bit of a disaster
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The Independent Online

That was another week with a lot of macro-economic news flying around and we have one coming up with yet more, including most probably an interest rate cut from the Bank of England. We'll come back to that in a moment. But let's start with two bits of micro-economic news.

The first is that Nissan in Sunderland is putting on a third shift to increase production of its Qashqai car. For the first time ever, the Sunderland plant is working round the clock – as indeed is BMW's Mini plant in Oxford. Nissan is taking on another 800 people as production, currently around 160,000 a year, is to go up to well over 200,000.

Why? The Qashqai is a small SUV that has been selling well in the UK and Russia. It has been selling so well in Russia that exports to Japan have been stopped and production stepped up. So this is a practical example of demand from the "Brics" (Brazil, Russia, India, China) offsetting any slowing of demand from the Group of Seven established economies. There has been a lot of stuff about "decoupling" – but could demand from the Brics offset a fall in demand from the US? And now "recoupling" – might a recession or near-recession in the US pull us all down? Here is some decoupling at work.

The other story comes from a friend who runs a small service business, selling partly to the UK but also right across Europe. I told her that I still believed there was such strong demand in the economy that things would canter on pretty strongly through the first part of this year at least, despite the housing market and the spin-off from a US slowdown.

"Well," she replied, "I have just had a better January than I did last year."

Now you have to be cautious about anecdotal evidence, particularly when it conflicts with published numbers. The sales figures for the Christmas sales have been pretty weak; the purchasing managers' survey of manufacturing opinion has been pointing to a downturn; the housing numbers, both prices and numbers of mortgage approvals, have been soft. But I expect this Tuesday to see a fairly solid outlook for services with the purchasing managers' survey for that sector, and we will almost certainly have this rate cut on Thursday. To be clear: as far as the UK is concerned, a slowdown is starting, but our econ-omy is not falling off a cliff, as the US one seems in danger of doing.

These are just forecasts, albeit competent ones, but they do underline the big message that this will be a year when the so-called "emerging" economies race on, while most of the developed ones slow markedly. The latest statistics from the US are dire, with payrolls falling, and some of us have the gravest doubts whether those panic cuts in interest rates will be effective. The US problem is not so much the price of credit but willingness to lend and lack of creditworthy borrowers. US banks are happy to extend credit lines to top-ranked customers. Another friend told me that a couple of months ago the company on whose board he sits had to renew credit lines of some $1bn with various international banks. The deals were done, with almost every bank renewing the lines at the same spread as before.

That the Brics will race on while the G7 slow is already reflected in a shift of power. There was another example of that last week, with the Chinese and the Canadians taking a large stake in mining group Rio Tinto, so throwing the bid by BHP Billiton into confusion. So power is not just with the Brics; it is also with resource-rich countries in the developed world, such as Canada. Take Australia, home to BHP and supplier of coal to China: it is expected to slow this year but only to 3 per cent, which sounds pretty good to the rest of us.

I suppose the main question that follows from all this, at least as far as Britons are concerned, is to what extent we will be insulated from the strains in the rest of the world. I think you have to distinguish between our fundamental competitiveness and our ability to adjust monetary and fiscal policy to cope. On the first, it is possible to be optimistic. If the world's financial service industry is hard hit, which it is, you might imagine the UK to be more affected than most, because we are so reliant on it. But City bon-uses this year do not seem too bad, and City firms say they are still taking on new graduates, even if they are thinning staff in general. Some sectors of the services industry, including lawyers and management consultants, are still run off their feet.

Besides, other parts of the economy are doing fine. We are only just a net importer of oil, and the sharp drop in the pound vis-à-vis the euro will help exports to Europe. With cuts in interest rates and an inherently sounder home- lending structure (bar Northern Rock), we should be able to avoid the scale of housing finance disaster in the US. And we have a flexible labour market, despite efforts by the EU to make it less so. There is a lot of evidence, some of which will be published in the January Economic Journal, that flexible labour markets enable a country to weather downturns with less damage to employment.

The problem is our capacity to respond with the appropriate monetary and fiscal policy. With hindsight, we should have tried to temper the housing boom by raising rates more aggressively – well, not entirely with hindsight, as some of us argued for that at the time. Sure, we can cut rates now and we should do so. But we would be better placed had we checked the boom even a few months earlier. And as for fiscal policy, I am afraid that is a bit of a disaster. Just how big we will learn on 12 March, the date of the Budget. It is an intriguing thought that Bank Governor Mervyn King, now anointed for his second term, will in all probability outlast the two people who appointed him, Messrs Brown and Darling.

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