Hamish McRae: Mists surround any autumn forecasts
Sunday 26 August 2012
The last weekend of the summer holidays is usually the signal for normal business to resume. August has not proved so wicked after all, unless you are in Greece, and the financial markets at least have managed to scramble through in decent enough shape.
Just last week the US Standard & Poor's 500 index hit a four-year high, and the FTSE 100 index is, at least, way up on a year ago. So why do those of us who spend our time pondering what is happening to the world economy feel, as I think most of us do, a sense of unease? How might the autumn unfold?
The general concern is that everyone is relying on the policy-makers to do the right things in the months ahead, whatever those might be. Here in the UK, there is the expectation of some policy shift towards encouraging growth, though whether it is realistic to expect much is questionable at best. Governments can pull levers but there may not be anything connected at the other end. Given the ominous deterioration of public finances since April, it is more likely the autumn will see more spending cuts not the reverse.
But the big economic stories are not domestic at all. They are: what will happen in the US, in Europe and in China. What should we look for in each?
This week sees the Republican convention in Tampa, Florida, unless it is disrupted by the threatened hurricane. The focus through the election campaign will be the chances of a hurricane running through US fiscal policy should the Republican team win office, given Mitt Romney's decision to pick Paul Ryan, a fiscal conservative, as running mate.
There have been various estimates of the likely profile of fiscal consolidation under the two leaderships, and while the deficit will have to come down under both, it would, on the face of it, seem likely it will come down faster under the Republicans.
But there are two complications that undermine this assumption. One is that under present legislation a set of huge tax increases automatically takes place at the end of the year, inconvenient timing were there to be a change of administration, and a pretty mad idea anyway. Rationally, tax changes should be fed in gradually and in synch with the economic cycle.
The other is that in the past it has been Democratic administrations that have been fiscally responsible and Republican ones the reverse. You can see the most recent examples of that in the main graph. Through the 1990s, with Bill Clinton as president, the deficit was steadied by a decline in spending and tax rises; by 2000 the Federal budget has moved into surplus. Then came the change of administration, with George W making pretty much the same fiscal errors as the Blair/Brown governments in the UK. You can see the soaring numbers for gross debt (higher than net debt) in the right-hand graph.
Somehow the US will have to repeat the exercise carried out under Clinton, but the gap, as you can see, is now much larger, and the starting point for the debt much higher. The closer we get to the election and to the fiscal cliff at the end of this year, the greater the concerns as to how this will be done.
And Europe? What can one say? There is an economic story, which is that the eurozone will struggle to escape recession, and there is a financial story: can the euro be buttressed, and if so how? But since what is happening is a battle between economic arithmetic and political will, the political story will dominate.
Provided Germany and France agree, crises can always be postponed for a few more weeks, and a few more weeks, and a few more weeks. They just have to sign the cheques. But you can see a gradual shift among the European high command from the notion that no country will ever leave the eurozone to one that it would not matter that much if Greece did.
So I think we simply must assume that the eurozone ructions will continue through the autumn and that an extreme outcome cannot be ruled out. In a way, the fact that eurozone's agony has continued for so long is a benefit. The European business community is now prepared for a break-up, even if it still thinks it unlikely. So the damage would be much easier to contain that it would have been even six months ago.
The new concern through the autumn, or at least new in our Western perceptions, is what is happening in China. A few months ago the question was whether it would achieve a so-called "soft landing": would it be able to slow growth without bringing the economy to a halt.
The mainstream view in Europe and the US was yes, if only on the grounds that so far the Chinese authorities had managed to cope remarkably well with global swings in demand. China had, after all, come through the recession in the advanced world with barely a slowing of growth.
Now, I think, the position is seen slightly differently. We are gradually becoming aware of the costs that China incurred by maintaining demand, essentially by engineering a huge investment boom, through the downswing elsewhere. Now, it is littered with empty residential properties, empty offices, roads that go nowhere, under-used factories and so on.
Until now the country has been able to grow through its mistakes and I suppose that continues for a while. If you build too fast, sooner or later the demand catches up. But those of us who remember the Japanese boom in the 1980s will sense tinges of recognition. China is earlier in the development process than Japan then was but at some stage growth has to slow, and making that transition is very hard to accomplish smoothly.
So an autumn of concerns lies ahead. We assume the policy-makers will respond appropriately here, in the US, in Europe, in China and elsewhere. Maybe they will. But it is hard not to feel a touch uneasy.
As one door opens another closes in UK housing policy
Two stories last week illustrate the conflicting attitudes we have towards housing policy.
One was the Government-commissioned report on ways of boosting institutional investment in housing. It argued that local authorities should have the freedom to waive requirements to include a proportion of affordable housing in private residential developments if that resulted in more institutional funds being invested in housing. The idea is that not only would you get more homes built but you would increase the supply of private rental accommodation.
The other was a Halifax report saying that homes in Britain are now more affordable than they have been for 15 years. The fall in prices and low mortgage rates meant monthly costs for a new borrower were the lowest relative to average earnings since 1997.
There is a North/South divide in that payments are lowest in Scotland and Northern Ireland (20 per cent of earnings) and highest in London (35 per cent), the South-east and South-west (32 per cent). But everywhere homes have become more affordable.
You see the paradox? We have had well-intended policies designed to create more affordable housing but the effect of seems to be that fewer homes are being built overall and institutional funds that might be invested in housing is going elsewhere.
Those policies were brought in to offset the social pressures exacerbated by the housing boom that was allowed to take place between the mid-1990s and 2007. Since then, however, the market has, at considerable cost, started to correct these excesses and, coupled with low interest rates, help make homes affordable again.
Moral? Well, for those of us who believe that policy should try to aim for macro-economic stability and then work with the grain of the markets rather than against, it is pretty simple.
The best way of making houses more affordable is to build more of them in places where there is the greatest demand. Meanwhile, beware policies that, however well-intentioned, make the underlying problem worse, not better.
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