Hamish McRae: Time for a party in this sea of troubles
Sunday 29 July 2012
It is party time. Actually for quite a lot of us it is holiday time too, and given the mass of depressing economic news from just about everywhere in the world, the summer break has come in the nick of time. Let's hope for a calm August, not a wicked one.
Start with a moment of reflection. Looking around the world it is pretty clear that some sort of pause is occurring. But we can have little feeling for the severity of slow-down, its duration, or the pace of recovery. The widespread expectation is that everything picks up next year and I think that is probably right; but meanwhile it will be a difficult autumn.
So what should anyone interested in the world economy be reflecting upon while watching the games, slipping off on holiday, or indeed maintaining the depleted ranks still at work?
As far as our own economy is concerned I don't think there will be much that is sensible to be said until September. It would at the best of times be hard to separate the noise from the Olympics from the signals from the real economy and these are not the best of times. Even those of us who don't believe the official GDP figures and think the economy is growing, would acknowledge that this is disappointing growth. The two key indicators in the month ahead will be employment — is the economy still creating jobs? — and inflation. If, and only if, inflation continues to fall it will be possible for living standards to start rising again, for household consumption is half of total economic demand. I think we just have to use our common sense in trying to figure out what is happening, rather than getting worked up about every conflicting headline.
Across the Channel? Well, anyone reading this in the south of Spain will have their own perception of the eurozone's travails, while in Italy one particular concern is the way the Spanish problems have spilled over and started affecting them. The general perception is that both countries will need a bailout of some sort as they will be unable to fund themselves at present interest rates. As far as the absolute level of debt is concerned, Italy is in a worse position than Spain, but Spain has been adding to its debt far faster, as you can see from the main graph. This shows the official projections for debt levels, which unsurprisingly come down, and some projections by Chris Watling at Longview Economics for the debt profile, assuming they could fund themselves at 6 per cent. As you can see, Italy could just about manage to cut its debt at that rate whereas Spain couldn't.
We will see some sort of concerted effort to patch up Spain's and Italy's finances in the coming weeks. But given the numbers involved, the size of the debt in the case of Italy and the projections for Spain, it is hard to see them achieving more than a patch. The best we can hope for is a quiet few weeks, perhaps with the focus shifting back to Greece; a few weeks perhaps bought by the statement from Mario Draghi, president of the ECB, that the bank will do "whatever it takes" to preserve the euro.
And Greece? There is no point in getting upset about this but it is quite clear that what the country has been asked to do cannot be done. So there will have to be another bailout. If, some time after 20 August, there is a formal default, so be it. The Greek government would be prudent to make arrangements for leaving the eurozone so that it has a fallback policy. I was intrigued to see some calculations by the Ifo Institute of Munich last week, which suggested that the losses to Germany and France would be slightly lower if Greece were to leave the eurozone than they would were she to stay in. My own feeling has long been that Greece leaving is inevitable and preferable for all.
But what about the US? It remains our largest export market as well as the largest part of our global asset portfolio. The latest GDP figures were disappointing, showing annual growth between 1 and 2 per cent, and also writing down past growth. (Initial US GDP data is generally revised down whereas our data is generally revised up.) But the headline issue this autumn will be what the country does about the so-called "fiscal cliff", when the Bush era tax cuts expire. When they do, they take a large wodge of demand out of the economy and whatever view you hold about the need for US fiscal probity you don't want the adjustment to happen in one clunk.
The US fiscal position is worse than that of the eurozone. The net debt figures, with some projections, are shown in the right-hand graph. Europe has a debt problem and is currently agonising about it. Thanks to its safe-haven status the US has not had to worry about funding itself and those of us who have worried about that increase from 35 per cent of GDP to 90 per cent in little more than a decade have so far been proved wrong. But it is an astounding shift. Anyone who remembers the parallel move during the 1960s from the US being the world's greatest creditor to being too weak to hold together the Bretton Woods system will be aware how swiftly perceptions of creditworthiness can be transformed.
So a sea of troubles, troubles compounded by the uncertainty about what is happening in China. And yet — well, maybe a slowdown in China is just what the rest of us need this autumn. If you look at the world economy as a whole, growth in China and the rest of east Asia is what has sustained demand for the past five years. But if you look at what has held back the recovery in the west it has been partly the failure of commodity and energy inflation to fall as much as it usually does during recession. So maybe the sunlit uplands will loom a little closer in the autumn. Meanwhile, we have to get through August.
Economic gloom has not stopped the world's tourists
The travel and tourism industry is having a solid year and not just here in the UK, where more human beings came in via Heathrow, left, last week than ever before – London remains the world's largest air hub by a large margin.
Thus for the first four months of this year, global air travel was up 8 per cent year-on-year. The fastest growth, as you might expect, was in the Middle East, up 18 per cent, the slowest North America, up 3 per cent. But Europe, supposedly struggling Europe, was up nearly 7 per cent.
But, Greece is in trouble. In the first part of this year tourist arrivals have been running down more than 11 per cent, probably the result of adverse publicity in Germany, though UK arrivals are down too. But Spain is doing quite well, with arrivals running up nearly 3 per cent.
From a national perspective, UK visits abroad have been running marginally down on 2011, but visits to the UK have been up by about 3 per cent over the year, and 6 per cent up during the past few months. We still have a huge deficit on travel and tourism, with us making 56 million visits abroad and people making only 31 million visits here, but the balance of payments gap has narrowed by more than £1.5bn over the year, to £13bn.
We have a tendency to forget how huge travel and tourism actually is. Added together, it is around 11 per cent of GDP, arguably the world's largest industry. It also employs a lot of people, many low-waged of course, but it also supports highly skilled jobs, for example in aircraft production.
So even modestly good news for this industry is modestly good news for the rest of us.
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