Hamish McRae: Whatever the data tells us, one thing is for sure: there's trouble ahead
Sunday 04 September 2011
After a disappointing summer, a darker autumn?
You do not have to be an assiduous reader of the economic news to feel dispirited by the relentless series of dismal stories over the past two months. They have come from just about everywhere in the developed world. In the past few days, there have been poor job figures from the US, further ructions in the eurozone and lacklustre stats here too.
This welter of poor or poorish data highlights an unresolved problem. It is that precise and reliable figures are partial and backward-looking. They tell you what has been happening in a particular chunk of the economy at some period in the past, but they don't give you a bigger picture and they don't look forward. By contrast, you can get forward-looking indicators for the whole economy but they depend on survey data – asking people what they think – and such numbers reflect a mood of the moment rather than what really will happen.
This applies everywhere, but there is a further problem that seems to be particularly serious in the UK. This is that our data is subject to huge revisions, so that the early stabs at what is happening may turn out to be quite wrong when looked at five years later. Initial estimates of GDP, particularly during recessions, have on balance indicated even worse performance than turns out to be the case. (The US has a reverse bias: its initial GDP estimates have historically been too optimistic.) Still, even allowing for this bias, there is no doubt that UK growth has been disappointing in the early stages of recovery and, worse, that some sort of further slowdown seems to be taking place. I take comfort from the fact that during the past year private-sector employment has increased by 2.3 per cent, the fastest rate since the late 1990s, but I have a nasty feeling this is slackening and may even go into reverse.
But that is just us. Looking around the developed world, a similar pause – let's call it that for the time being – seems to be taking place. The evidence is so widespread that it would be absurd not to acknowledge the dangers. But rather than trek through the latest morass of data, I have been looking at some more reflective work by the Ifo Institute in Munich and the University of Munich's Centre for Economic Studies. They produce a quarterly study called the World Economic Survey, which polls more than 1,000 economic experts in more than 100 countries. The polling predates the August mayhem but is, I think, more useful for that: you get thoughtful judgements, not market twitches.
The main graph shows the report's world economic climate, together with the actual global growth numbers, and a couple of points are immediately apparent. One is that the climate has cooled a bit. The gains during the first half of the year have been lost and, while the absolute levels of the index point to continued growth, it is for the developed world a disappointing recovery.
The general point the report makes is that the developed world and emerging world are cooling for different reasons. In North America and Western Europe the problem is lack-lustre growth from a low base. But in Asia the issue is how to engineer slower growth from an unsustainably high level. I suppose you could say that a slowdown is bad news in the developed world but good news in the emerging countries. And the projected growth of 4.3 per cent for the world economy this year is pretty much normal when set against the experience of the past decade.
A survey is only a survey. People change their opinions. But the sheer breadth of the study gives it a certain solidity and its track record suggests that it has been a reasonable lead indicator of trouble ahead. So I think its big message is that there will be a slowdown but not another dip towards recession. The world is still in its upswing phase; just not nearly as strong an upswing as the experts expected at the beginning of the year. We should be able to live with that.
But there are, as you would expect at this stage of the cycle, many dangers. The one likely to loom largest in the coming weeks is the plight of the weaker members of the eurozone.
The good news first. It looks as though Ireland will make it. By that I mean that its economic recovery is now reasonably solid, its public finances are coming back under control and it will be able to fund itself on the markets within a couple of years. It is not there yet and the huge backlog of property-related debt remains daunting. The human misery of people stuck with mortgages higher than the value of their homes or with property for which there is no market at all, will not dissipate fast. But a turning point may have been reached and the government and the people of Ireland deserve credit for that. Those of us who are optimistic about the country's prospects can feel a little less worried.
You can see the scale of one bit of the adjustment in the right-hand graph. Ireland's labour costs had risen absurdly during the boom years, but look at the way they have come back close to mainstream European levels. Ireland went into the eurozone at a slightly undervalued rate so the fact that labour costs are still a bit higher than the rest of the pack need not matter too much.
Germany, by contrast, went into the eurozone at too high a rate and had to spend much of the first decade of membership grinding down its costs. Now it is highly competitive again – much more so relative to France or Italy, its main European rivals. This divergence within Europe seems to be as fundamental an issue as the sovereign debt/bailout one. Coping with this divergence requires not just further austerity packages by the weaker countries' governments, it requires personal austerity in the form of wage cuts.
The bad news is that European imbalances are still so serious that several countries may move back towards recession in the next few months. Even if that is too pessimistic, it will not be an easy winter ahead.
The services index is hugely important, but monetary policy is a non-event
One British number will be interesting this week. It will be the purchasing managers' index for service industries, out on Monday. The point there is that private-sector service industries account for 42 per cent of GDP, and nearly 54 per cent if you add in distribution. So what this part of the economy thinks about future trends is enormously important. Last month, the service industries were still reasonably positive. If they still are, that suggests continued OK growth in the third quarter. If not, it will be time to worry a bit more.
The other thing to look at this week will be President Obama's "jobs" speech on Thursday. The detail will be important – infrastructural spending, support for people struggling with mortgages, tweaks to the tax system, and so on – but so too will be the reaction. The tax elements in particular may have resonance beyond the US. But the response may be pretty sceptical: do people believe that it is within the power of the administration to do anything significant on job creation? Or is it just political guff?
It is also the week of the Bank of England Monetary Policy Committee meeting and of the council of the European Central Bank. It would be most surprising if there were any change of policy on rates or quantitative easing in either case, but Kremlin-watchers will note the language of the ECB statement to see if there are hints of rate cuts later in the year. It would be embarrassing to do so, for such a move would tacitly acknowledge that the increases in rates earlier this year were a mistake.
As for the Bank of England, the economic slowdown has obvio-usly pushed the increase in UK rates well into 2012, notwithstanding the dreadful inflation performance. It is funny, isn't it, how monetary policy has become such a non-event and how the careful structure of Bank of England independence has become a matter of form rather than of substance?
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