Hamish McRae: By 2015, doomsayers will be proved wrong
Sunday 29 April 2012
The UK is not in recession and is currently growing at an annual rate of between 1 per cent and 2 per cent. But the economy did dip briefly into negative growth last summer. The eurozone economy was shrinking during the second half of last year but has started to grow again, albeit very slowly. And the US did have a slowdown last year (though it just avoided shrinking) but is now growing at a little over 2 per cent a year.
Those statements are not what the official data is recording, but given the unreliability of all official data, not just our own, they seem to me to be a better starting point from which to try to figure out what is going to happen in the months ahead. For the record, the official data maintains the UK economy shrank in the first quarter of this year, while the US officially grew at an annual rate of 2.2 per cent. We will not get the first estimate for the eurozone until 15 May but it is expected to be negative.
Why the official figures should be so wrong remains a mystery. But, the fact remains that in the UK and to a lesser extent in Europe, the initial estimates of growth greatly understate the final outcome. The right-hand graph shows the average growth rate for the eurozone, the UK and the US as initially reported for the entire period between 1999 and 2009. As you can see it was 1.2 per cent annual rate for the eurozone, 1.5 per cent for the UK and 2.4 per cent for the US. When, up to three years later, the final figures were known, these estimates had been revised to 1.5 per cent, 2 per cent and 2 per cent respectively. In other words, in Europe the numbers were under-estimated by 0.3 per cent, in the UK by 0.5 per cent, while in the US they were overestimated by 0.4 per cent.
You see my point. If the Office for National Statistics has made the same error of judgement as it has on average for the decade to 2009, there was no second dip to the recession at all. But we won't know for another two or three years. And it is nice reinforcement of national stereotypes that while we in Britain and Europe are reticent in our initial estimates of growth, the Americans brag about theirs and then have to recant later.
So how can we get a better feeling for what is happening? The statements at the start of this column are based not on official data but on a new indicator developed by Goldman Sachs, which it calls a current activity indicator. The idea is to give a more up-to-date and more accurate assessment of what is happening than is available from the official numbers.
To do this the economics team at Goldman looks at a wide variety of numbers that tells us, or at least ought to, what is actually happening in the US, UK and eurozone. These include retail sales, imports and exports, hours worked, surveys of business expectations and so on. You can see the results in the main graph.
The main point the Goldman economists make is that the US and UK are performing better than the eurozone and, if they are right, all this stuff about UK economy being back in recession is nonsense. I find the assessment of the eurozone comforting too. It is, of course, a huge area and different bits of it are performing very differently. But, if they are right, what is happening now to the eurozone economy as a whole is difficult – and very difficult indeed for the southern countries that are really struggling with their debts – rather than absolutely dreadful.
So let's take this assessment of where we are as correct. Where do the these three areas go from here?
Starting with the UK, there seems to me to be a reasonable expectation that modest growth will be maintained. There have long been two main elements of fragility. One is inflation, which as we all know is cutting real incomes. We have to hope that by the autumn we get back towards the official band of plus or minus 0.5 per cent of 2 per cent. Much will depend on sterling (a bit stronger recently) and energy and other import prices. The other long-standing source of fragility is Europe, of which more in a moment.
To these, I am afraid, now have to be added the "bad news" effect from the stories about recession. Fortunately, people don't seem to pay too much attention to negative economic stories, particularly when they don't square with their experience, but at the margin the wall of gloom must have some effect. If companies were to postpone investment or shade back hiring plans, and if people were to postpone consumer purchases, then we could talk ourselves into a period of very slow growth.
And Europe? It has been a bad few days: the French elections, the fall of the Dutch government, the down-rating of Spanish debt, plus lots of bad data, all combined to whip up long-running concerns. It is conceivable that there will be some huge disjunction in the coming weeks – Greece leaving the euro, whatever. But I am encouraged by that sign that the eurozone may have recovered a little and we should never discount the political will to keep things going a bit longer.
Finally the US: here the problem is not now, but later this year and next. We have to assume that after the election, the president will have to take action to correct the deficit. As the graph shows, until the middle of last year, despite it making less fiscal progress than either the UK or the eurozone, the US was not doing materially better than the rest of us.
For the past year it has grown somewhat faster but at the end of this year the fiscal boost is projected to end. The president has either to extend the tax holidays instituted by President Bush and continued under President Obama or end them. At some stage the US has to embark on the same slog, paying down debt, as the rest of us.
If this sounds dispiriting it should not. There has been a plethora of comment in the past few days about this being the slowest recovery ever and about the fragility of the progress made. But given the scale of the excesses to be corrected it was bound to be slow. In different ways the different parts of the world have made progress in correcting the mistakes. And, for those of us with long memories, this does not feel nearly as fragile as the 1970s.
Think of what we could do with 300 million Chinese tourists
As people get richer one of the things they spend dramatically more on is travel. So it should come as no surprise that there is a tourist boom in Asia.
It has become the largest market for aircraft. Eight of the world's top 10 air routes in terms of passenger numbers are in Asia. It has also seen a huge boom in Chinese tourism, rising from fewer than five million outbound mainland tourists in 1996 to more than 70 million last year.
The initial beneficiaries of this have been the two separately administered regions, Hong Kong, left, and Macau as you might expect. But other growing destinations include Taiwan, Korea, Singapore, Malaysia and Thailand, all of which received more than a million Chinese tourists last year. The growth of travel to Taiwan is fascinating and is the result of the easing of relations between the countries.
But the most fascinating thing of all is that this phenomenon is still in its early stages. Capital Economics has drawn a neat little calculation, showing how the growth of Chinese tourism is following very closely the growth of Japanese tourism a generation earlier. The difference, of course, is that Japan's population is one-10th that of China. At present only 5 per cent of Chinese people take a trip abroad each year, compared with 13 per cent of Japanese and 20 per cent of Koreans. You could, in theory, have 300 million Chinese travelling abroad in a generation.
The questions that raises for us are obvious. You do not need to think hard to see the opportunity.
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