Hamish McRae: The recovery will be slow, difficult and unlike any we've known before

Economic view from Davos
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The Independent Online

We can't see the bottom yet. One of the more depressing aspects of this year's World Economic Forum, and there were plenty, was the sense the politicians can pull the levers but there is nothing connected at the other end. So far the huge effort to reboot the world economy has failed. The costs of that effort will be with taxpayers for a decade, maybe a generation. So there is inevitably a sense that it has all been wasted. The bankers – not many of them in Davos this year for obvious reasons – may be the pariahs now, but the blame will spread.

The politicians know that. It was evident in Gordon Brown's press conference here on Friday: defensive, eager to sound confident, broadly sensible in his analysis but unconvincing because the UK is going into the recession in a weaker position than other major economies. Britain is simply not credible at the moment, as the foreign exchanges bear witness. It is not just economics that will be different during the next 10 years; politics will be different too.

But just because policies have failed so far that does not mean they will fail for ever. Just as recessions take time to work their way though the system, so too do the policies designed to blunt their impact. It would have been astounding were the world economy to turn round in the next few months, for that would make it the shortest of the major post-war downturns. If this one follows a "normal" pattern you would expect to see some growth by the middle of 2010, not before, and that is a long way off.

Meanwhile there will be more troubling news, such as the new plunge in the Japanese economy, and more policies designed to pump things up, such as this extra liquidity being created by the Bank of England.

Two images capture what is happening. One is Wyle E Coyote, the Warner Brothers character who is always chasing the Roadrunner. You know the scene. Roadrunner screeches to a halt just before a cliff. Coyote doesn't stop in time, carries on running in mid-air for a few moments, looks down and realises that there is nothing beneath. Only then does he plunge down.

The other is the brick attached to a elastic band. You pull the band, it stretches and the brick stays put. But keep pulling and suddenly the brick comes towards you.

The first is the behaviour of consumers (particularly in the US) last year. The warning signs were there but people kept on spending right through to the autumn. Then demand fell off the cliff. The second is the response of the economy to the present policy stimuli. Nothing is happening but sooner or later the world economy will respond. You just have to keep pulling.

To carry the second analogy a little further, you might ask: what happens if the elastic band breaks? That would be to project some sort of global political and economic disaster on the lines of the 1930s depression. There are always the doom-mongers who take that line and there are some of them here, speaking to packed sessions, in Davos. But then there were people who warned of an economic catastrophe as a result of the Millennium bug, or the 1970s and 1980s oil shocks, or the Asian financial collapse. They were a quarter right, but only a quarter.

Two comments from friends here stuck in my mind, one from a top British financial official, the other a best-selling American author. The meat of the first was: "Look, we're not clever enough to stop a recession and that will go on for another year or so, but to say that we can't do anything to stop it becoming a 1930s-style depression is ridiculous."

The meat of the other was: "You are right in saying that this will be recession similar to those of the 1970s, 1980s and 1990s, but I do worry about the destruction of global wealth and that will have consequences that we can't yet judge and it may bring us into new territory."

So: a recovery but maybe a different sort of recovery than that from previous post-war cycles. That sounds sensible to me. What might the characteristics of the recovery be?

Let's talk global rather than UK because what happens to the world matters most. In any case we will presumably have a new government for the recovery. (Both David Cameron and George Osborne were here and from a brief chat they sounded rather more chipper than our poor Prime Minister.)

Try these three characteristics. First, the recovery will be relatively slow. There may be a bounce in the coming months but it would be wrong to trust that it will be sustained as the fundamental pre-conditions for recovery are not there. These include households around the world, and particularly in the US, getting their borrowings under control and weaker companies sorting out their balance sheets.

Second, the recovery will see much slower increases in consumption than in previous cycles, particularly in the US and UK. So the economic numbers will look better but living standards won't rise, or at least not by much, maybe for a decade. Part of the reason for this will be higher personal taxation, part the need for people to save more in some form or other.

Third, there will be a lot of social and political disruption in both the developed and emerging countries. Expectations have risen worldwide and those expectations cannot be met. The danger is that voters will take it out on politicians and that their response will be damaging or incompetent. One obvious thing would be ill-conceived regulation; another, this fear evident in Davos, of financial protectionism.

I know the received wisdom now is that this will be the worst downturn since the Second World War and because everyone seems convinced of that it would be mad to bet against it. But to me it feels very like the 1970s. A long period of reasonable stability is coming to an end and there is fear that the authorities can't hold things together. Then it was the end of fixed exchange rate system and the great inflation that followed. Confidence was shattered and discipline had to be re-imposed by the central banks. Now it is the end of "innovative" finance, as opposed to plain-vanilla sensible finance. Confidence is shattered and discipline has to be restored, discipline not only over banking but also over fiscal policy.

So even if the recession is "normal" in the sense that it will be within the bounds of post-war experience – as I expect – the recovery will be abnormal. The positive view is that of course there will be a recovery. But the negative spin on that is that it will be a slow slog rather than a quick bounce. But we know that, and we don't need people in Davos to tell us. Maybe we can build a fairer and more equitable society out of this.

Conclusions from Davos: beautiful or not, small is the way forward

If the big picture in Davos was one of pretty unremitting gloom, the small one has been more encouraging. They don't hit the headlines, but there are always lots of small presentations and discussions that tell you things about the world you didn't know. If you want a word that brings these together it's "technology".

The technology is not here, of course. Bill Gates is, but he's more interested in talking about philanthropy that his own business, and that is fine. Al Gore is here, but he's talking about the grand politics of climate change, not the mechanics. My point is simply that you become aware that there is a huge amount going on and that technology advances irrespective of the boom-and-bust cycle. Nanotechnology, carbon capture, cloud computing, energy efficiency – reams of stuff happening, some of which will make a material difference.

That leads to a bigger thought: that what will ultimately increase living standards over the next generation, make a contribution to reducing our footprint on the planet, help us become healthier, with better-balanced lives, will be technology. You can see this now in lots of small ways: using technology to do things better, cheaper and faster. And you can see it in big ways: the advance of hi-tech India, bringing middle-class lifestyles to millions. The good news is that there is no evidence that the advance is slowing; the reverse, if anything.

The question then is: how can more people move to this middle-class lifestyle without increasing their environmental footprint? How can they get richer in a sustainable manner?

Listening to people here, it seems part of the answer will be in applying technology to agriculture, but often in what sounds like quite small ways: monitoring the needs of crops for water, so you use enough but not too much; or rolling out solar power as technology cuts the cost of solar panels. All just the clever application of things we already know.

Humankind can make big obvious failures, and we know all about that. But it can also generate small and less obvious successes and, taking a long view, these are far more important in improving human welfare.