Hamish McRae: Glimmers of light on road to 'normality'
Sunday 21 October 2012
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.
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