Confusing signals

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The Independent Online
How secure is the economic recovery? These are confusing times for British economy watchers - though the watchers themselves frequently add to the confusion.

On the one hand, most professional forecasters, both in the official world and in the commercial financial institutions, have been revising up their forecasts for growth this year.

On the other hand, the papers have been full of doom and gloom, with headlines like 'Recovery hopes dealt double blow' as inflation has started to nudge upwards and manufacturing output has faltered, though that negative tone will now be amended slightly with the better-than-expected unemployment numbers.

Yet it is possible to reconcile these rather different judgements. Indeed, understanding the development of the economy through the next three or four years turns on understanding why this recovery does not feel like one, yet is a recovery none the less.

The forecasts for calendar 1993 first. At the beginning of the year most of these were in the 1-1.25 per cent range. The popular view was that there would be some growth but not enough to stop unemployment rising and that any faster recovery would be aborted as the economy ran into balance of payments problems.

The current account does remain a concern, but there have been two surprises. One is that unemployment, instead of growing, has certainly levelled off and the trend may be slightly down. The other is that the growth forecasts were undoubledly too pessimistic.

The consensus would be for growth of between 1.75 and 2 per cent, leaving it perfectly possible that, once the figures are revised and re-revised, growth will turn out to be higher still.

Yet there is equally little doubt that the sharp rise in the first half of the year has lost some of its momentum. The conventional explanation for this slowdown, that exports have been hit by poor demand from Continental Europe, is for once true. Any open economy exporting roughly a quarter of its gross domestic product will be damaged if its largest export market, in this case Germany, hits a serious recession.

And the effect of this will show most strongly in the sector of the economy most dedicated towards exports, manufacturing. Some further faltering of the growth of industrial production is likely.

So much of the growth that will come will not be in manufacturing, but in private sector services.

These are much harder to identify. There are no monthly figures for the output of the business and financial services sector, yet in total size it is now not far short of manufacturing. There are no monthly figures for 'cultural output' of the television, record, film amd theatre industries.

There are no monthly figures for what, for want of a better term, might be called personal services - everything from nursing homes to nannies. By definition there are no figures for the black economy. Yet these will be the sectors within which much of the growth, not just this year but through the entire recovery, will come.

Of course there are partial figures. One can look at passengers through BAA airports (up sharply) or telephone traffic through BT (ditto). There are good monthly retail sales figures. But there is no easy way to aggregate all these activities, while new kinds of endeavour - such as the expansion into telecommunications by the cable television franchises - take months to be picked up.

The best way, perhaps, of getting a speedy feel for the overall level of turnover in the whole economy is to look at narrow money, M0. This is running up year-on-year at a little over 5.5 per cent, which would be consistent with 3.5 per cent underlying inflation and 2 per cent growth.

It is not intellectually respectable to make mechanistic calculations like that, for the links are pretty loose, but the figures are interesting none the less. What is more, they are available week by week, for one can get a good approximation of M0 from the banking data on notes in circulation.

If anything, the rate of growth of notes in circulation seems to be accelerating. These were up 5.6 per cent year-on-year last week, 5.8 per cent this. This rise may to some extent reflect a slight rekindling of inflation, but it is not a sign of an economy that is flat on its back.


And this is what will happen in the future. The conventional indicators of the economy will be very muted. Manufacturing is not going to perform strongly, certainly until the big Continental markets recover. There will be periodic blows to confidence. It is quite possible that at some stage there will be a pause in the recovery lasting six months or more. Indeed, we may be in just such a pause at the moment, in which case growth will have a struggle to get into the 2 per cent region this year.

But that is no reason to doubt that a gradual, low-key recovery is in place and will continue through at least the next three years.

Where does this leave the growth estimates for next year? The consensus at present is for strong growth in 1994, with some of the more bullish City forecasters, like Nomura Research Institute, expecting 3 per cent growth.

I suspect this will prove too high. While on past performance one ought to get strong growth in the second and third years of recovery as an investment boom reinforces consumption, this time we may see much less of a surge.

This is partly because growth in many service industries does not require much investment. But small-scale, people-orientated businesses can increase output more easily by adding labour than they can by adding equipment. And, even when businesses do wish to invest, they will resist doing so if it means borrowing.

Result: by conventional measures there will be two or three years of halting, muted growth. But ultimately it will be more secure than the boom-bust cycle of the late 1980s.