Go to the wire, Mr Brown. This is not a comment on the local elections last week or indeed the business about the London Mayor. It is simply that there has been mounting evidence in the past week that 2009 will not be a bundle of fun. Accordingly, the best chance the Government has of persuading voters to give it another term is to hope that by the summer of 2010 there will be a clear economic recovery in place.
We can get too fussed about economic data, and constant temperature-taking becomes counter-productive: the more you chew over the statistics, the more confusing they appear. But some things have happened over the past few days that suggest the damage to the housing market is more serious than seemed to be the case a month or so ago, and that the squeeze on real incomes will also be tighter than expected.
The best starting point is the Bank of England's Financial Stability Report. The big message here is that the worst of the financial crisis may be past but banking will not return to the easy money conditions of the past four or five years. That is all quite heartening. It makes no sense for banks to lend money to people who cannot pay it back; the default rate on credit card debt has risen to 8 per cent, which means sound borrowers have to pay for dud ones. But equally, too little lending is the route to recession. That is why the £50bn injection of liquidity into the banking system is so welcome.
The report does, however, have a sting in the tail. The Bank now seems seriously concerned that even as the acute phase of the banking crisis passes, its aftermath will so spook the bankers that they will not be prepared to supply sufficient funds even to sound borrowers. That is a danger for both personal and corporate customers but it is most obvious in the housing market. You can see from the first graph what has been happening to the supply of mortgages. These are running at half the level of a year ago and lower than the level during most of the early 1990s.
Now this is the number of mortgages, not the value, so the absolute amount of money being lent is much higher today than then. But the lenders are also tightening their terms. As a building society rather than a bank, Nationwide should have been less affected by the squeeze than the banks, with their greater need for wholesale market funds. Yet last week it stopped granting 95 per cent mortgages.
The reason is that falling property prices undermine the security of the loan, so lenders feel they need more headroom. House prices are now down year-on-year but that was inevitable given what has been happening month-by-month. More worrying, the pace of decline seems to be increasing. There are now quite a few predictions that prices will fall by 20 per cent over the next two or three years.
If this were to happen, it would be a much sharper decline than the big lenders currently expect and will make their terms even tougher. I had felt that a long plateau in prices, perhaps lasting a decade, was more likely than a plunge, but the latest data is very weak indeed. This does not have to mean a surge in repossessions, as happened during the early 1990s, for employment is much stronger now than then. But there is certainly not going to be much of a recovery in house prices before 2010, and meanwhile people will find their real incomes squeezed.
It is this that is affecting consumer confidence. Employment remains at a record level but, for most people, real incomes are now falling. It is not a difficult calculation: the retail price index, which takes into account mortgage payments, is running at 3.8 per cent and official average earnings are up 3.6 per cent. In practice, things are worse. The RPI, quite correctly, is based on the average spending of people in the medium term. But if you look short-term at what people spend each month on essentials – food, petrol, council tax – these have been shooting up far faster than general inflation. The result, shown in the other graph, is that consumers are gloomier than at any time since 1993.
Let's come back to politics. Voters are not stupid or unfair in their assessment of a government's performance. In 1992, the economy was only just emerging from recession, but they felt on balance that the incumbent government was more likely to be able to cope. In 1997 the recovery was assured, yet voters felt able to turn out the government. Maybe that was because they were confident the economic base was secure, or maybe they remembered the messy circumstances that created the conditions for the boom: the ejection of sterling from the ERM.
The economic conditions under which the next general election will be fought will be much more akin to 1992 than 1997. There are no credible forecasts for UK growth in 2010 – it is pretty hard to get the current year right, let alone the next one and certainly not the one beyond – but it is possible that come 2010 we will have come through the nasty period and be starting to see the basis for the next phase of growth. But even if that does happen, will the present government get the credit?
If I were Gordon Brown, one thing would worry me more than anything else. He was on the Today programme last Wednesday defending the 10 per cent income tax mistake, and he made the quite correct point that he had not increased tax to 40 per cent of GDP, as challenged, and actually had not put it up very much. But that is not the perception: somehow he has managed to make us feel much more highly taxed than we actually are.
I cannot quite figure out how he has done it. Maybe it is the increased complexity of the tax system; maybe the visibility of things like the tax on air fares or the rise in car licences; maybe we have rumbled the idea of stealth taxes so are acutely aware of his attempts at sleight of hand; or maybe we just feel our money is being wasted.
Whatever the explanation, it is bad to have the perception of being a high-tax government at a time when people's real incomes are being squeezed. That is why he should play this one long.
AMERICA LOOKS TO ITS SHOPPING MALLS FOR SALVATION
Another cut in US interest rates, to 2 per cent, some not too bad figures on US growth last week and yet some really dreadful figures from the housing sector: it is all a bit of a puzzle.
From our own perspective, there are two issues. Can a housing crash coexist with some economic growth – slow growth, to be sure, but growth nonetheless? And why on earth have interest rates close to 2 per cent failed to resuscitate the market?
The housing numbers in the US are staggering. New construction is back to early 1990s levels, and that with a larger population now than then. As for prices of existing homes, over the past three months these have fallen at an annual rate of 25 per cent. So the pace of decline is actually picking up.
Yet there is growth. Consumption is still creeping upwards, despite higher oil prices. Exports are rising, helped by the very weak dollar. Inventories have risen, which is a bit worrying because swings in stocks will unwind. The general comment has been that these are weak numbers, justifying the cut in interest rates, but at least the econ-omy is not in recession. Let's wait another quarter but it's perfectly possible that the US may escape recession – technically defined as two successive quarters of negative growth.
If the economy does, however, dip further, there is not much that can be done on the monetary front to boost it. If 2 per cent interest rates don't pump things up, why should 1 per cent? The cuts in rates are not passing through to consumer borrowing costs because the money markets are still gummed up. However, the precedent of Japan in the 1990s is discouraging, when even zero interest rates failed to stimulate demand.
Fortunately, Americans are not like the Japanese: if they have the cash, or even if they don't, they will keep spending. As was said in the early 2000s downturn, and adapting Billy Ocean: "When the going gets tough, the tough get shopping."Reuse content