Hamish McRae: Germany and France do not make a recovery, but things are on the up

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The Independent Online

So the recession is officially over in Germany and France. Phew! Both countries recorded reasonable growth in the second quarter and though the eurozone as a whole was down a little, the fact that its two largest economies should be ahead is good news. We were still heading down in the second quarter, as was the US and the next tier of European economies, Italy, Spain and the Netherlands. But Japan may have been up and in any case there is a decent chance that most of the developed world will be growing again during the present quarter. It looks as though the UK may have bottomed out in May.

You can have two reactions to this. One is the yah-boo of politics, saying that our Government had somehow failed because France and Germany beat us out of recession.

That is silly for a string of reasons. France and Germany went into recession a little ahead of us so it is reasonable they might emerge a bit earlier. Another is that the figures will, I suspect, be revised, certainly in the case of the UK. But the most important one is that what matters is the sustainability of the recovery, not the precise moment when it starts.

The other and more mature reaction is to recognise and celebrate that the recession is probably over but then to try to figure out what we can sensibly expect to happen in the coming months.

I must admit to a sense of relief that things are turning round, not least because it does now look as though my judgement that this recession in the UK would not be as bad as the early 1980s may be proved right. All that talk of another Great Depression can now be seen to be alarmist rubbish.

But equally, it is important to recognise that this recovery is very fragile. Sure, recoveries are always fragile in these initial stages but a lot of things are happening around the world that are especially troubling.

For a start, the US economy is still in a mess. Financial market confidence has improved radically but consumer confidence is still low and the banks remain weak. The housing market has steadied a bit but house prices may yet fall further.

Mortgage arrears are dreadful, far higher than here in the UK. Employment is still falling, with all the extra jobs created in the last boom now having been destroyed – and then some. More bad news is on the way, with the danger that some nasty surprise hits a still-weak economy and pushes it into another dip.

On the Continent, the danger is that these French and German numbers are just a bit too good to be true and even if they do prove to be right, much of their strength may have come from an inventory bounce. Thus the second quarter may have looked good because the first one was so dreadful and therefore is not a signal of a sustained rise in final demand.

A further concern is that Chinese growth, which has been driven by a massive shift in demand from exports to home consumption, may not prove sustainable. It has been astounding how the Chinese authorities have managed to pump up demand, but the concern is that the outlook is not as optimistic as people thought. The stock market suddenly turned weak after the central bank signalled that the liquidity shovelled into the system would start to be withdrawn.

True, what happens in China particularly affects energy and commodity markets, so slower growth there in one sense is helpful to most of the West because it will tend to reduce pressure on raw material markets. But it would be naive of us to think that we would escape unaffected if China suffered a serious reverse.

And in the UK? The big shadow hanging over everything is the state of public finances. It is an unreal time. This massive problem which cannot be tackled for another nine months because of the impending election. Worse, the Government cannot even be frank about the nature and scale of the problem because it has to try to explain its troubles as a natural consequence of the global recession, rather than its own spending policies. So we are in a policy no-man's land, when nothing significant can happen and much of what it does try to do will be reversed in a few months' time. If, as it perfectly possible, the Tories do not get a clear majority, they may not feel they have authority to get to grips with public finances and we could have a difficult situation indeed.

Politics and public finances apart, though, here are some reasons for a bit of optimism. The Bank of England's new Inflation Report, out last week, was notably more positive about growth for next year than it was three months ago. It is hard to deduce exact growth numbers and the forecasts are in the form of a range of probabilities rather than a single figure but it looks as though the Bank's forecast for 2010 has come up to about 1.7 per cent, from perhaps 0.3 per cent three months ago.

The Bank did not put this spin on its forecast at all, rather the reverse, so let's be cautious. We can say that next year looks like seeing reasonable growth. I have not seen any independent forecaster put in a 2 per cent figure yet, but I expect to see steady upward revisions to the forecasts in the coming months.

The trouble is that even 2 per cent growth is below the long-term trend, so that would be consistent with rising unemployment. And from next year onwards, the economy will face the burden of rising taxation, while the cuts in public spending will further reduce demand. So what will happen? The most likely outcome seems to be something like this.

We will look back on the present moment as being the bottom of the recession. In the coming months, a string of contrasting news will emerge rather than a solid story of progress. A second dip may well come some time next year, which will scare everyone. And then, from 2011 through to – who can say? – 2017, decent global growth, stronger in some countries than others, will pull even the weaker members of the convoy along with the stronger ones.

Will the UK be a weaker or stronger member? In the previous two expansions during the 1990s and the 2000s, we were leaders of the developed country group. My guess is that this time we will be middle of the pack. We have lost a lot of the advantages we had. Some structural reforms of the 1980s and early 1990s have been reversed; we no longer have a tax advantage either at a company or a personal level; and we have a larger fiscal correction than most other countries. However resilient the economy really is, it will be pushing into some strong headwinds. But at least, and at last, there will be some growth.

Women arise, and bring wiser, middle-class spending habits with you

Women's shopping power is attracting attention in these tough times. Not only is gender equality spreading though most of the emerging economies as well as the developed world; this is happening as a new middle class is growing rapidly in the emerging economies.

The result is a surge in both the size of the market of middle-class women, and also their spending power, something that has caught the eye of investment bank Goldman Sachs. The total number of people in the global middle class will rise from around 1.7 billion now to 3.6 billion by 2030. In a new paper, "The Power of the Purse", Goldman argues that not only will this expanding middle class spend more; it will spend differently. Women's spending preferences will become much more important. In the next few years, the biggest impact of these consumers will come in China and Russia; then Mexico, Indonesia, the Philippines and India will come to matter too. By about 2040, Goldman estimates, nearly 90 per cent of India's population will be "middle-class".

But how will women change purchasing preferences? Here the Goldman paper is pretty straightforward. "Middle-class women," it concludes, "are likely to spend their household funds on goods and services that improve the welfare of the household, including food, education, healthcare, financial products and services, apparel, consumer durables and childcare."

The thing I find really stunning is not so much the gender issue but the scale of the wider social shift. We are on the way, in another generation, to being a middle-class world. That raises huge questions about the resources needed to sustain a middle-class lifestyle, about the cultural and social leadership that will come from this new middle class, about the implications of the shift of power away from the middle classes of the present developed world, and so on.

If the women of the new middle class are wiser in their spending patterns, then that will be a big bonus.

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