Sean O’Grady: In the alphabet soup that is world economics, the skewed W is my bet

Economic view
Click to follow
The Independent Online

Well, which is it to be: a W or a V? Economists seem to enjoy this parlour game, and you'd be surprised at how inventive they can be when describing the likely trajectory of the economy in figurative terms. The "V" school obviously think we're in for a rapid recovery, though I'm not sure what they think will happen next.

Those who think, as I do still, that W stands for "wecovery" go along with the V school to the extent that we think the recovery may be more rapid and stronger than seemed likely a few months ago, but we doubt how sustained it will be. There is a particular refinement of the W, which has the second downward stroke less deep than the first, followers of which we may term the "Skewed W" school. I have also heard of those who think the economy will follow a "reversed square root sign" path (I'll let you have a moment to figure that one out); a U (slower than a V); an L (pretty pessimistic, that); an ECG monitor (healthy heart); and a bathtub. Like Lego, these can stick together in most combinations, so you can have a VW, or a VL or an LV and so on. Any more?

As it happens, I think the skewed W still works. Compared with where we were a year ago – post-Lehmans bust, market meltdown, banking giants crashing everywhere, confidence shredded, end of the world stuff – we are in an impossibly hopeful position now. The first downward phase of our W last year was almost unprecedentedly deep. It was also highly synchronised, the product of our tightly integrated globalised world with international supply chains and free and instantaneous movements of capital.

To digress for a moment on that point, we all watched the queues outside Northern Rock two years ago, the first run on a bank since 1866, the symbol of the credit crunch; but the physical withdrawal of cash was not that bad, some people in the know tell me. What really hurt was a more serious and instant electronic run on the Rock, prompted by those distressing images. Thus the root cause of the Rock's downfall may have simply been that it had relatively few branches and the ones it had, often formerly small shops, were fairly cramped. Had the queues not formed outside them then the electronic run, which caused the real damage, might not have happened. Those spacious Victorian bank premises had a point to them, you see.

In any case, we can be fairly sure that we'll see no more runs and we're over the worst of the downturn. That's because we are through the "inventory recession". This happens in all recessions, as shops sell out of stock rather than send new orders back to the factory. So a smallish fall in demand at the retail end – say 20 per cent – can result in a savage cutback in output at the factory end – maybe 100 per cent. This is no exaggeration – it is more or less what befell the world's car makers. The credit crunch has also passed its most vicious phase, and it was this special factor that made this recession especially difficult. The OECD's index of global financial conditions shows them on the path to normality. Note how steeply they deteriorated in the autumn of 2008 (again the Lehmans effect). World trade has settled, and investors seem to have recovered their "risk appetite" with a stock market rally – but again note the catastrophic late-2008 Lehmans effect on both.

For the recovery since the depths of post-Lehmans depression we can thank the unprecedented levels of international government support for the world economy. France, Germany and Japan are in growth already; we'll follow later this year. Tax cuts, public spending, borrowing and "quantitative easing", the direct injection by central banks of cash into the economy, have all helped. As has the support for the banks. It may be annoying that so much of that money seems just to go out of the door and into the pockets of "greedy bankers", but that is essentially a second-order problem. The big picture is that no one is now looking for the next bank to fail, as they were a year ago.

But these factors also imply a relapse when they wear off. We're heading to the top of the first U in our W. As retailers and producers rebuild stocks, we'll see a healthy bounce back in activity, which is showing up in the growth numbers in some countries. That, in turn, will stabilise and the oscillations will dampen down, as inventory correction and counter-correction become less violent.

More worrying is the inevitable withdrawal of official support for the economy. All the talk at the G20 about the timing of "exit strategies" was just that – a matter of timing not principle. As usual, differences at summits get exaggerated. No one wants to withdraw all the support now; equally, no one thinks it can last forever.

The trick is timing, and the substance of the argument is about a difference of a few months or a year at most. The UK is already planning some fiscal retrenchment, more spending cuts will come. We also know that the timing of exit strategies may be less the prerogative of ministers and more down to markets. For if they don't want the debt that governments are issuing, we will see the price of those securities drop and their yields rise, and higher interest rates are the last thing we need. The point is that that official support won't last much longer.

So having looked a year back, let us peer a year ahead, to the G20 Summit of autumn 2010. World leaders will be able to congratulate themselves on having hauled the world out of recession through bold and co-ordinated actions. In political terms (though it will be too late by then), Mr Brown, leader of the opposition, will be able to say that he was indeed right, and that if we had followed the Conservatives' polices we would not have spent our way out of recession. Equally, however, the Conservatives are right in saying that our gigantic debt burden – public and private – will stymie our recovery for years. The debt overhang will drag on recovery, as we pay off debts, public and private. That will depress spending and output, and push us into a second dip, once official support has ebbed away.

Will it? I'd say it is more than likely that world interest rates will be higher next year than they are now, and that governments will be spending and borrowing less and that taxes will be going up. I doubt the UK will be stable and vigorous enough to withstand such a turn of events. There just isn't enough momentum in the economy for it to return to trend growth of 2.5 per cent that quickly.

A double dip, then, looks plausible, though that second dip will not be on the biblical scale of the first one. And the longer investment stays depressed, the lower that trend rate of growth will be. So I'm sticking to my skewed W.

Scrappage deal gives manufacturers a boost – in South Korea

Just over 100,000 cars have been sold under the UK's car scrappage scheme since it was launched in May, and the market leader, Ford, is the predictable winner with 13,003 Fiestas, Kas and Focuses finding happy owners.

But that is by no means all the story. You'd expect Ford to do well. What we might not have expected to see, but which could have been predicted on the basis of experience of the German scrappage programme, was that the Korean car companies are the ones which have really reaped the rewards of the British taxpayer's £300m largesse.

Usually tidying up the lower reaches of the car sales charts, they are right at the top of the tree now. Value-for-money Hyundai come second in the scrappage league table, with 12,752 sold, and if you add to those some 7,372 Kia cars, because Hyundai owns Kia, you get a total of 20,134. Multiply that by the £1,000 per car subsidy, and we find a £20m transfer payment from us to a South Korean car maker. Kamsamnida, as they say in Seoul.

Where does all that money end up? Some in South Korea, of course, but also in eastern Europe and India, where Hyundai makes its i10 model – which in July was the UK's ninth bestselling model. That was quite a moment, actually – the first Indian-made car to enter the UK's top 10.

Now Hyundai/Kia may make some good cars, but none are manufactured in the UK. At least Ford makes some engines here. When the scrappage scheme was announced, it was supposed to be a great help to the UK car industry. It has certainly helped the motor trade, those who sell, service and market mostly imported vehicles. But, of the famous UK brands, only 52 Jaguars, 189 Land Rovers and 1,556 Minis were registered under the scheme. Factor in a few thousand more UK-made Hondas, Nissans and Toyotas and that's about it – say a £6m boost. We'd have been much better off throwing the £300m directly at Jaguar Land Rover.

One thing you can't say about this Government, though, is that it's protectionist.