Hamish McRae: Either way, we begin the autumn with half a glass
Economic View: All in all, the job figures are consistent with a slowly-growing economy rather than one in recession
Thursday 13 September 2012
The back-to-school mood has lifted a little, with some slivers of evidence that the forthcoming term might not be as dismal as many feared. That is not a thought just to be applied to the UK, but rather to the world economy as a whole, for while none of the difficulties of the global economy is going to be fixed this autumn, the recent evidence is, well, not too bad. As always there is too much information. But if you stand back from the newsflow, you can see several helpful influences at work.
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We have gone towards the autumn with a slowing world economy. It has not ground to a halt by any means, but as you can see from the first graph, there has been a gradual shading down of growth over the past 18 months. It is that slither downwards that is troubling the authorities in all the main economic zones.
The result is that policymakers the world over are deciding that they need to find ways of promoting growth. So we will almost certainly get some kind of monetary stimulus in the US, announced (or at least signalled) later today. There are real doubts about the efficacy of monetary policy at a time when the authorities are simultaneously requiring banks to shrink – I know that is not the stated aim of regulatory policy, but that is the effect. And there are real doubts about the long-term costs of having central banks spray money around the world. Surely all our past experience suggests this will result in inflation in a few years' time?
But in the short term, having ultra-loose monetary policy just about everywhere except southern Europe must have some effect on the real economy. And the tightening of monetary conditions in southern Europe is not a planned policy, but rather the side-effect of the capital flight that is taking place from the fringe countries' banks, for obvious reasons: you get your money out while you still can.
So we get some more easing from the US today. Yesterday we had the sensible decision by the German constitutional court that the government could go ahead with the plan to set up a permanent support fund for the eurozone, the so-called European Stability Mechanism, but with a cap on Germany's contribution to it. The government cannot increase that without going back to parliament to get support. That is sensible because the decision to put at risk taxpayers' funds must be a political decision and bills to create the ESM had been passed by both houses. But it is reasonable that the contingent liabilities on taxpayers should be explicit and known.
One of the great problems at the moment is that the German taxpayer is carrying huge and unknown liabilities for the rest of Europe though the back-door support by the European Central Bank. This is on top of any future bond purchases the ECB may make following its announcement last week.
The German court decision simply means that the ESM will go ahead as planned. That may not seem much, particularly since the funds available are insufficient to rescue Spain as and when its Prime Minister admits that the country does indeed need a sovereign bailout. But it removes an uncertainty, and in the present climate of unpleasantness and hostility in Europe simply removing one source of uncertainty is helpful.
It is worth noting too that while the eurozone economy is undoubtedly struggling, there are sparks of light. The second graph shows one of those: industrial production. As you can see, expectations have become very negative and you would, as a result, expect manufacturing output to be plunging. Actually it seems to have turned up a bit. That may be just a blip and the growth will be skewed towards Germany, but it would be absurd to dismiss encouraging information just because it conflicts with what was expected.
We also had reasonably encouraging jobs data yesterday, with a continuation of the trend of recent months whereby overall employment rises, but with the growth more in part-time jobs and self-employment than in full-time posts. There is something of the glass being half full or half empty about them.
If you look at the headline numbers, the falling inactivity rates or the increase in the number of hours worked, this is all good news. Most of the part-timers – more than 80 per cent – are happy with their workload, although a minority say they would prefer to be in full-time work. The fact remains that in absolute numbers of jobs we are close to the all-time peak. However, on a glass-half-empty view, our labour market may be creating less secure jobs, and there is still a lot of slack in the market. Besides, the size of the workforce is rising so you would expect the number of jobs to rise too.
All in all, the job figures are consistent with a slowly growing economy rather than one in recession, but we need much faster growth to regain the ground lost as a result of recession and indeed to begin paying off the national debt.
That leads to a further concern: will the Coalition miss its deficit-reduction target this year? The next monthly public accounts do not come through until the end of next week, but so far this year the numbers have been disappointing. The Chancellor cannot go to an explicit Plan B, reversing his entire deficit-reduction programme, but he has already had to slow it down to a Plan A done more slowly. I suspect we may have to move to Plan A done very much more slowly, and we will learn of that later this year.
None of this – what the Fed is doing, what Europe is doing, what we are doing, or what the Chinese, the Indians and the rest of the emerging world are doing – will mean the world economy races ahead this autumn. What I think it will mean is that the worst fears of a widespread slide back to stagnation will prove unfounded.
What any one government or central bank can do is quite limited. Collectively, though, these measures have a cumulative effect. Maybe this assessment is too glass-half-full, but I do think the world economy goes into the autumn in better shape than seemed likely before the holidays.
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