Hamish McRae: There's more bad news to come, but here are five reasons to be cheerful...
Sunday 13 November 2011
So this weekend the "technocrats" take over from the politicians in Italy and Greece.
When things get really bad countries find ways to put financially literate people in charge – or, to repeat the point that has been made in these pages before, when politics and economics clash, economics wins in the end. There is, unfortunately, a lot of collateral damage on the way, and given the hand they have been dealt the technocrats may fail.
Indeed, in the case of Greece they will fail because the burden being loaded on to the Greek people is too great to bear. The maths simply don't work. The plan the country is supposed to be implementing will, if everything goes all right, get its debt burden down to 120 per cent of GDP by 2020. Er, that would the same level as Italy now.
That is bad news and there will be more to come. At a European level the technocrats have not yet taken over from the politicians, which is why the European sovereign-debt crisis has escalated and will continue to do so. Spain and France are under increasing pressure. Unfortunately, the advent of the euro has increased economic divergence across Europe, driving it apart rather than bringing it together. Economics will win in the end, but not yet. I still expect that the politicians will hold the eurozone together through this cycle, but will be unable to do so through the next one. So there will be another recession in the eurozone and the open question is whether this coming downturn will be serious enough to force structural change or whether things can be cobbled together for a few more years.
None of us can know the answer to that. Much will turn on the scale of this new dip in Europe. You can catch some feel for that from the right-hand graph, which shows the Purchasing Managers' Index for the eurozone since 1998, and which gives a short lead indicator for GDP. (This index is derived by asking companies what they think will happen to output and other variables in the coming months.) The economics team at ING Bank has plotted the two together, with the PMI advanced three months. As you can see, the numbers point to recession but at the moment are far short of the disaster of 2008/9.
Could this really be as bad for Europe as the last slump? The European Commission came out with some forecasts last week showing GDP falling by 0.1 per cent in the final quarter of this year and being unchanged in the first quarter of next. That does not sound too bad, except, as David Owen of Jefferies International notes, this is almost exactly the same as its forecast in 2008 after Lehman Brothers collapsed. As it turned out, growth fell by 1.8 per cent in the final quarter of 2008 and by another 2.7 per cent in the first quarter of 2009. Let's hope the forecasts are not as off-beam now.
My instinct remains that while the eurozone will find things very tough, from a global perspective this is not yet nearly as serious as 2008/9. Let's look at five bits of evidence for this.
The first is what has happened to equity markets. Simon Ward of Henderson Global Investors notes that since early October world share prices are up 12 per cent: "The commentariat, as usual, has chosen to focus obsessively on negative developments ... while ignoring important supports for the global economy and asset prices."
One important support is shown in the main graph, the second bit of positive evidence. Since the spring, global money supply has risen sharply – the central banks have got the printing presses rolling – and that provides a cushion both for output and for share and other asset prices. It is quite true that the mechanism linking an increase in money supply to an increase in output is uncertain, but if you look globally, the central banks anticipated the present slowing of the world economy, whereas in 2008/9 they left things too late. As output plunged, global money supply initially was allowed to go negative, a serious error.
It is true that global industrial output (here showing the output of the G7 developed nations plus the seven largest emerging economies, the so-called E7) has been weak. But it is not that weak, and there is more positive evidence to be cited.
Exhibit three, so-to-speak, is the trend in US employment. There has been reasonable growth in private-sector hiring, more than offsetting job losses in the public sector. And the Conference Board's employment trends index is at a post-recovery high.
China? Well the fourth bit of evidence is that it seems to have engineered a "soft landing", with the great worry of inflation, particularly on food prices, coming back under control.
The final positive element is in our housing market. All the latest figures suggest it is pretty flat, but prices have not plunged as some have forecast, and the latest data from the Royal Institution of Chartered Surveyors shows new buyer inquiries and sales expectations are the strongest since May 2010. There is no boom and in parts of the country property remains depressed. But we don't want a boom, and the present reasonable stability is in sharp contrast to the fears in 2008/9.
Pull all this together and what do you get? There is no doubt that the European sovereign-debt crisis is a serious threat to global economic stability. We in Britain are insulated financially, for we seem to have become a "safe haven" for fund money. The yield on 10-year gilts is just over 2 per cent, the lowest since the 1950s. Given the huge deficit the coalition inherited and is still battling, this is a massive vote of confidence in British governance. It also gives a tiny bit of wriggle room for fiscal policy; money not spent on interest is money free for other spending, or tax cuts. Credit where it is due: the coalition deserves to take a bow.
But the UK is not insulated in economic terms and we must hope that the eurozone scrambles along in slightly better shape. Ultimately, I think the European Central Bank may have to print the money to stop a wider financial collapse there. There are huge political difficulties but this is textbook stuff: in an extreme crisis the central bank has to provide unlimited liquidity to the markets. It may come to that.
Tata proves fortune favours the brave, succeeding where BMW and Ford failed
More credit where it is due, to Tata Motors for their stewardship of Jaguar Land Rover. Last week the company announced it was taking on another 1,000 workers at its Solihull plant.
Add in expansion at Castle Bromwich and an inflation-linked pay deal, and you have an extraordinary turnabout from the near-disaster a couple of years ago when it seemed that one of the two main plants was likely to close.
It seems an even greater achievement when you recall that none of the previous owners, British, American and German, managed to make a success of either marque. Indeed it is an extraordinary tribute to the embedded strength of the brands that they survived at all.
So, what is it that Tata knows that Ford and BMW, two of the great giants of global car manufacturing didn't? Tata, huge in many areas of Indian industry, is not a strong car maker at all. It hit the headlines with its tiny Nano but the bulk of its car production is at Jaguar Land Rover.
It is too early to do more than sketch an answer but I suspect when the venture's history is written there will be three main elements. One is timing. Tata bought the group when a lot of the hard work in developing models had been done, but the pressure on Ford to sell was strong. Buying at the time of a serious slump is dangerous and it stretched Tata, but it turned out well. The devaluation of sterling came at a good time too.
The second is that emerging world connections are essential, and the two upmarket brands resonate with Indian and Chinese buyers. That is where the growth is and will be.
And the third is that this matters to Tata, whereas it was a distraction to the BMW and Ford. So Tata hired good people (ironically from BMW) and gave them the freedom to do things better.
There is a long way to go, but Tata deserves a following wind.
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