Hamish McRae: There'll be a double dip. But if the world grows, we'll trudge upwards
Sunday 04 July 2010
How seriously should we take the fears of a double dip to the recession? The probability that there will be some sort of pause to the recovery has been foreshadowed in these columns for some time so in a sense what has happened in the stock markets over the past month should come as no surprise.
The markets do, in their incoherent and infuriating way, give some sort of early warning of economic trends for the months ahead. They signalled the turning point in the world economy last summer and the strong bounce off the bottom, and now they are suggesting there will be some sort of pause in growth. As has also been argued here, this frequently happens during the recovery phase, when growth falters and activity maybe even fall back for a while before growth is sustained.
But something worse than a pause? There are always people who prefer to see the glass as half empty rather than half full, but let's look at the evidence, first for the world economy and then for our own prospects.
In the US there has been a sudden realisation that fiscal policy is flipping from being expansionary to restrictive. The "cash for clunkers" car rebate scheme ended some months ago. But the support measures for homebuyers, which gave, in effect, up to $8,000 (£5,300) to purchasers, also ended in June and has unsurprisingly hit home sales and prices.
There is also a growing awareness that in another six months, US middle and upper earners (and many small businesses) will see income tax rates rise. The US has to start correcting its fiscal deficit, but it would be naïve to think that increasing tax rates does not knock consumption a bit. Since consumption is some 70 per cent of US demand, slower growth seems inevitable.
These blows, however, hit an economy that has started decent above-trend growth. The graph shows some forecasts for this year from Commerzbank in Germany, which show the US and Canada growing at more than 3 per cent this year. Japan, Germany and Sweden are all doing well. As Commerzbank notes, aside from the US, the greatest problems are in countries that had property or government debt crises, in particular the Eurozone periphery and the UK.
Germany apart, there is not a lot of growth in the Eurozone. By past standards this is not a particularly fast recovery from recession, which is disappointing given the depth of the recession. But the fact remains that the three largest economies of the developed world are growing above their long-term trend.
There is a further European worry: the state of the banking system. Many continental banks are loaded with sovereign debt from Greece, Portugal and Spain. This debt is trading well below its issue price because of fears that these countries might default. As a result, some of the banks would be bust were they to have to take these losses on to their books. Unsurprisingly, other banks are loath to lend to them. So they are being kept alive by loans from the European Central Bank, which is prepared to accept sovereign debt as collateral. This is not a happy situation for anyone, including would-be commercial borrowers from the banks and is likely to be a continuing drag on growth.
What of the rest of the world? Virtually all the growth in demand for the past three years has come from the emerging world and, in particular, from China and India. During the past few days, one of the things that has been unnerving the markets has been a sign of slowing growth in China. It is hard to evaluate this from a distance but the basic point worth making is that some slowing of growth is necessary after the 11 per cent growth of the past year and the Chinese authorities have been trying to rein things back for some months.
Why should this worry people?I think it is just that everyone at the moment is looking for things to worry about: the half-empty mentality currently rules.
There is plenty of "half-empty-ism" in the UK right now. There was the revelation last week of the Office for Budgetary Responsibility's calculations about job losses in the public sector, which raise the obvious question as to whether the private sector can take up the slack. The OBR thinks it can, hence its projections of falling unemployment. But doubts remain.
This issue got a lot more publicity than the story of the results of the gilt auction, where the Treasury sold a huge wodge of 30-year debt at a very good price. So you could say that the benefit of the budget in terms of our ability to finance the deficit and in terms of lower long-term interest rates is already showing through. Besides, there was not much alternative.
Nevertheless, we are going to see a continuing and severe squeeze not just on public spending but as a result of higher taxation.
Richard Jeffrey at Cazenove has written a note that puts this clearly. He points out that in 1998-99, before Gordon Brown let spending rip, total public spending was 37.3 per cent of GDP. As we went into recession it had risen to 41.1 per cent; in 2009-10 it reached 47.5 per cent; and under the current Government's plans it comes down to 39.8 per cent in 2015-16.
While over that five-year period, 80 per cent of the reduction will come from cuts in spending rather than increases in taxation, that is not so true in the early years. In 2011-12 (the fiscal year starting next April) only 57 per cent of the cuts come from lower spending.
So from next year we are going to be paying a lot more tax. Can we realistically, under these circumstances, expect consumers to keep going and maintain economic growth? Or, put another way, most of the concern about the drag on growth has focussed on the impact of cuts in spending, but there may be a greater threat from increased taxation. It is a dreadful legacy and it comes from, I am afraid, Gordon Brown's period as Chancellor.
Perhaps the most realistic view to take is to acknowledge that there is likely to be a dip in growth, maybe a period when the economy actually shrinks, in the first half of next year as the tax burden mounts. But if the world economy goes on growing through next year and beyond, and there is really no evidence that it will not do so, the UK will be pulled along by that.
So, yes, there will be a double dip of sorts in the UK and in some other parts of the developed world, though we can't judge quite how serious this will be. If the UK economy follows the course of the 1980s it will not get back to its previous peak until 2012, probably the end of 2012. Then there will be the debts to be repaid, so there will still be a long trudge ahead. But it is a trudge, not a catastrophe, and the general direction will continue to be upwards.
Look on the bright side, we live a lot longer than we did in the '70s
Social Trends, the annual compendium of statistics about the way we live now, has been running for 40 years and the latest edition has produced some previously unpublished data about education, health, social security, crime and the environment. Did you know, for example, that nearly a quarter of adults in England in 2008 were obese? Or that plastic card fraud hit a record that year? But perhaps the most interesting aspect of the exercise is to look back and see the longer-term changes that have occurred to our society, and this issue has highlighted some of the changes that have taken place since the early 1970s.
Key points include the surge in foreign holidays: in 1971 just 6.7 million people took a trip abroad, whereas in 2008 it was 45.5 million. University education has soared too, with 621,000 students in higher education in 1970-71 against 2.5 million in 2007-08. As most people know, smoking has gone down, while life expectancy has gone up. The proportion of households with just one person has risen, from 18 to 29 per cent. Obviously, car use has risen too, from only half of households having the use of one, to four-fifths.
But perhaps the most unexpected change is the way we spend our money. In the early 1970s, the largest single category of spending, 21 per cent of household income, was on food and non-alcoholic drink. Now it is on housing and fuel. Living standards overall are much higher, but a central necessity of life – finding somewhere to live – is a much bigger burden both in absolute and relative terms. That should set us thinking about whether we are building enough homes, and nice enough ones, and if not, why not? To what extent are planning controls reducing our standard of living?
That leads into all those questions as to whether life is better or worse than it was a generation ago, to which the common-sense response would be mostly better. The additional life expectancy over a generation is extraordinary; men live six years longer (75 against 68.7 years) and women five years longer (81.9 against 77.8 years). That must be good news. However much we fret about the problems of an ageing society it must, if you think about it, be better than the reverse.
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