Hamish McRae: Glimmers of light on road to 'normality'

Economic View

It is the question everyone asks. How far have we got to go before the economy is, for want of a better phrase, back to normal? It is a good time to ask it for we have last week passed a couple of milestones. One was that employment has passed its previous peak; the other that retail sales are also at a new high. This week we will get another mildly encouraging signal – third-quarter GDP figures which are expected to show resumed growth. But there is still a long way to go.

Where to begin? Well, jobs matter and the fact that the economy seems to be creating them at close to a record rate must be welcome. We are all very aware that the labour market has changed: that many of the new jobs are part time or self-employment. Some people in both of those categories would prefer a full-time, salaried job.

As for retail sales, that too is encouraging, but thanks to the rise in the population, we are not consuming as much per head as we were at the peak. Consumer confidence is perking up a little and our car market is the strongest in Europe, for registrations here are up on the first nine months of the year, whereas in every other large market they are down. But real incomes are still falling as inflation remains a bit above 2 per cent a year and earnings are a bit below. The two lines should cross over next year, but they haven't yet.

There was one other modest glimmer of light last week on public finances. You may recall that the fiscal deficit this year was going up rather than down, which boded ill for the whole, deficit-reduction programme. Most of us thought that as a result of shortfalls on revenue, the Chancellor would have to announce a slowing-down of the whole plan in the autumn statement on 5 December. Well, it turns out that the figures were not as bad as was thought, as they have been revised.

There is still an overshoot, but six months into the financial year, that overshoot is less than £3bn. That could conceivably be clawed back in the second half. Two of the three biggest taxes are doing fine, with VAT receipts up 3.4 per cent on the previous year (as you would expect from higher sales) and National Insurance up by 4.6 per cent (as you would expect from higher employment). But income tax revenues are down by 0.9 per cent and it is the biggest tax of all. I suspect it is high earners cutting their incomes or having their incomes cut for them, but it is too early to know for sure.

So there has been some progress at a national level, even if somewhat slower than any of us would have liked. The projections of the Office for Budget Responsibility, showing the budget deficit not dropping below 3 per cent of GDP until 2015-16 are probably still just about right. So you could say that this parliament's job is to stabilise the national debt, while that of the next parliament will be to start to try to get it down. But what about our position as individuals: to what extent have we started to get our debts under control?

Here the housing market is the key. The graphs show two ways of looking at what has been happening. On the left is the familiar one of house prices relative to average earnings. As you can see, prices have now fallen towards the long-run ratio of just over four-to-one, but they are not there yet. You can see on the right-hand graph the cause of the property boom, a surge in net mortgage lending from between £1bn and £2bn a month before 2002 to a peak of £12bn a month in the boom years. Now, net lending for house purchase is virtually zero. In other words, the new mortgages being issued are almost balanced by the old ones being paid off.

I must say, looking at those graphs, I find it astounding that the Bank of England ignored what was clearly a housing bubble.

All those people on the Bank's monetary policy committee were worrying about tiny changes to current inflation and preening themselves for presiding over the NICE decade – non-inflationary continuous expansion – and yet they allowed this to happen. The upsetting thing is that the authorities had made the same mistake in the 1970s, and yet the folk memory was not strong enough to stop it happening again. Common sense should have told the committee members they were stoking a mad boom – but they were, I am afraid, those most damaging of people, clever fools.

Still, we are where we are. We are managing to maintain reasonable stability in the housing market with very little mortgage money coming in. It feels to me as though we will have another four or so years of, on average, stable house prices and the same of slowly rising earnings and then the ratio will have dipped below four and found some sort of base.

Encouragingly, people seem gradually to be getting their personal balance sheets into kilter. Between 1997 and 2007 people withdrew equity from their homes; since then they have been repaying mortgage debt. Household savings ratios are now around their long-term average of 6-7 per cent of income. The debt-to-asset levels are still high but they are starting to fall and in another four or five years should be back to pre-1997 levels.

Chris Watling of Longview Economics has done some sums on all this and concludes that households' discretionary income – what is left to spend after paying for essential items such as mortgages, food, heating, transport and so on – will rise this year by more than 1.5 per cent, the best increase since 2005.

Pull all this together and you could say that it will be another four years before we are back to normal. But – and this is a subject for another day – the new normal won't be like the old normal. That great public spending splurge will not happen again for a generation.

Quick recovery from Black Monday gave false hope of security

Black Monday – a quarter of a century ago, the financial markets were riven by a global collapse in shares, an event that seemed, at the time, to be of cataclysmic proportions, a signal of the tensions within the world's financial system and a hint of catastrophe to come.

Well, it wasn't. Or rather, from today's perspective, it was a blip in a long bull market for shares, for the equity markets did not peak until the beginning of 2000, more than 12 years on.

Nor was it even a signal of a serious recession. Yes, there was a recession in the early 1990s but it was not as serious in most countries as the recession of the early 1980s and, in any case, the recession was four years away.

What I think the crash of October 1987 did was quite different. Because shares recovered so quickly it lulled us into a false sense of security about long-term value in equity markets. Paradoxically, far from undermining the cult of the equity, it reinforced it.

As a result, towards the end of the 1990s people became carried away with the dot-com boom, believing any short-term devaluation in share markets would be quickly corrected. Even now, more than a decade on, we still have not reached the peak of share values reached then. As for signalling what might happen to the world economy in the longer-term, the crash seems irrelevant.

Over the past 25 years, the most important thing in the global economy has been the growth of the emerging world, in particular what we now call the Brics. In 1987 they were so small, in economic terms, as to be ignored. Now they generate more than half the additional demand on Earth – a different world indeed.

News
The cartoon produced by Bruce MacKinnon for the Halifax Chronicle-Herald on Thursday, showing the bronze soldiers of the war memorial in Ottawa welcoming Corporal Cirillo into their midst
news
Voices
Funds raised from the sale of poppies help the members of the armed forces with financial difficulties
voicesLindsey German: The best way of protecting soldiers is to stop sending them into disastrous conflicts
Voices
Nigel Farage has backed DJ Mike Read's new Ukip song
voicesNigel Farage: Where is the Left’s outrage over the sexual abuse of girls in the North of England?
Property
One bedroom terraced house for sale, Richmond Avenue, Islington, London N1. On with Winkworths for £275,000.
property
PROMOTED VIDEO
News
The Edge and his wife, Morleigh Steinberg, at the Academy Awards in 2014
peopleGuitarist faces protests over plan to build mansions in Malibu
News
i100
News
peopleFox presenter gives her less than favourable view of women in politics
News
Mario Balotelli has been accused of 'threateningly' telling a woman to stop photographing his Ferrari
peoplePolice investigate claim Balotelli acted 'threateningly' towards a woman photographing his Ferrari
Arts and Entertainment
Paul Anderson plays Arthur Shelby in Peaky Blinders series two
tvReview: Arthur Shelby Jr seems to be losing his mind as his younger brother lets him run riot in London
Life and Style
The Zinger Double Down King, which is a bun-less burger released in Korea
food + drinkKFC unveils breadless meat beast
News
ebooksAn unforgettable anthology of contemporary reportage
Arts and Entertainment
A shared vision: Cerys Matthews has been familiarising herself with Dylan Thomas’s material, for a revealing radio programme
arts + entsA singer, her uncle and a special relationship with Dylan Thomas
News
In other news ... Jon Snow performed at last year's Newsroom's Got Talent charity event
people
News
i100
Life and Style
Text messaging changes as a relationship evolves
life
News
The comedian, 42, made the controversial comment following the athlete’s sentencing to five years for the culpable homicide of Reeva Steenkamp on Tuesday
peopleComedian's quip about Reeva Steenkamp was less than well received at music magazine awards
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SQL Developer with T-SQL, Watford, Hertfordshire - £350 - £360

£350 - £360 per day: Ashdown Group: SQL Developer with T-SQL, Watford, Hertfor...

Chief Financial Officer

120-150k: Accountancy Action: We are looking for an experienced CFO from a min...

IT Systems Business Analyst - Watford - £28k + bonus + benefits

£24000 - £28000 per annum + bonus & benefits: Ashdown Group: IT Business Syste...

Trainee Recruitment Consultant - Birmingham - Real Staffing

£18000 - £23000 per annum + Commission: SThree: The SThree group is a world le...

Day In a Page

Wilko Johnson, now the bad news: musician splits with manager after police investigate assault claims

Wilko Johnson, now the bad news

Former Dr Feelgood splits with manager after police investigate assault claims
Mark Udall: The Democrat Senator with a fight on his hands ahead of the US midterm elections

Mark Udall: The Democrat Senator with a fight on his hands

The Senator for Colorado is for gay rights, for abortion rights – and in the Republicans’ sights as they threaten to take control of the Senate next month
New discoveries show more contact between far-flung prehistoric humans than had been thought

New discoveries show more contact between far-flung prehistoric humans than had been thought

Evidence found of contact between Easter Islanders and South America
Cerys Matthews reveals how her uncle taped 150 interviews for a biography of Dylan Thomas

Cerys Matthews on Dylan Thomas

The singer reveals how her uncle taped 150 interviews for a biography of the famous Welsh poet
The Battle of the Five Armies: Air New Zealand releases new Hobbit-inspired in-flight video

Air New Zealand's wizard in-flight video

The airline has released a new Hobbit-inspired clip dubbed "The most epic safety video ever made"
11 best sonic skincare brushes

11 best sonic skincare brushes

Forget the flannel - take skincare to the next level by using your favourite cleanser with a sonic facial brush
How could three tourists have been battered within an inch of their lives by a burglar in a plush London hotel?

A crime that reveals London's dark heart

How could three tourists have been battered within an inch of their lives by a burglar in a plush London hotel?
Meet 'Porridge' and 'Vampire': Chinese state TV is offering advice for citizens picking a Western moniker

Lost in translation: Western monikers

Chinese state TV is offering advice for citizens picking a Western moniker. Simon Usborne, who met a 'Porridge' and a 'Vampire' while in China, can see the problem
Handy hacks that make life easier: New book reveals how to rid your inbox of spam, protect your passwords and amplify your iPhone

Handy hacks that make life easier

New book reveals how to rid your email inbox of spam, protect your passwords and amplify your iPhone with a loo-roll
KidZania lets children try their hands at being a firefighter, doctor or factory worker for the day

KidZania: It's a small world

The new 'educational entertainment experience' in London's Shepherd's Bush will allow children to try out the jobs that are usually undertaken by adults, including firefighter, doctor or factory worker
Renée Zellweger's real crime has been to age in an industry that prizes women's youth over humanity

'Renée Zellweger's real crime was to age'

The actress's altered appearance raised eyebrows at Elle's Women in Hollywood awards on Monday
From Cinderella to The Jungle Book, Disney plans live-action remakes of animated classics

Disney plans live-action remakes of animated classics

From Cinderella to The Jungle Book, Patrick Grafton-Green wonders if they can ever recapture the old magic
Thousands of teenagers to visit battlefields of the First World War in new Government scheme

Pupils to visit First World War battlefields

A new Government scheme aims to bring the the horrors of the conflict to life over the next five years
The 10 best smartphone accessories

Make the most of your mobile: 10 best smartphone accessories

Try these add-ons for everything from secret charging to making sure you never lose your keys again
Mario Balotelli substituted at half-time against Real Madrid: Was this shirt swapping the real reason?

Liverpool v Real Madrid

Mario Balotelli substituted at half-time. Was shirt swapping the real reason?