Don't take the slowdown story for granted just yet
Kevin Gardiner on reasons to be cheerful
Thursday 08 January 1998
Optimists, such as the Morgan Stanley team, look for growth of a little more than 3 per cent, a relatively modest deceleration from 1997's likely 3.5 per cent. But all of the 34 frequent forecasters surveyed by Consensus Economics in early December expect growth to slow, as do less frequent forecasters such as the Treasury, the Bank of England, the OECD and the IMF.
Such uniformity is rare - and unsettling. Groucho Marx didn't want to belong to a club that would have him as a member, and in the realm of investment analysis, his instincts were just as sound. The economic risks in 1998 are surely not as one-sided as these collective forecasts suggest.
There are of course good, objective arguments for expecting the economy to slow in the year ahead. Export growth seems likely to wilt as the strong pound and Asian retrenchment bite. The increases in mortgage rates will make themselves felt more fully; and disposable income growth will also suffer from the absence of last year's tax cuts, and from the small tax increases announced in July's Budget. The building society windfalls must also eventually fade into the rear-view mirror.
But a solid argument is no guarantee of an accurate forecast: our understanding of the forces which drive the economy is much less precise than our carefully articulated models and spreadsheets. A resurgence in consumer confidence, for example, could yet blow the slowdown scenario out of the water. And there are indeed reasons for consumers to be cheerful.
There has been much talk of a reformed UK consumer, cowed by the twin threats of excessive past borrowing and job insecurity. But in reality, the household balance sheet is not fragile, in aggregate, but dauntingly strong, while job security may actually be improving.
Consumer debt rose fivefold between 1980 and 1990, more than twice as quickly as incomes. And at no time since 1990 has the amount of debt fallen: it has continued to rise, though a little less rapidly than income. However, even after mortgage rates have risen by a fifth in the last year, the aggregate interest bill is still running at levels, relative to incomes, roughly half as high as those which in 1990 pushed the economy into recession.
Moreover, much of the surge in borrowing during the 1980s was in effect a one-off response to the ending of credit and mortgage rationing, and to the sale of council houses: viewed in this context, and with the adjustment behind us, it looks less alarming.
Meanwhile, consumer assets - the forgotten side of the balance sheet - amount to three-and-a-half trillion pounds, compared to total borrowing of just over half a trillion pounds. As house prices have recovered - and share prices have hit new highs - the ratio of aggregate net wealth to personal income has now almost recouped the ground lost since 1989 (see chart).
Indeed, if houses, life assurance and pension funds are excluded from the calculation in an attempt to define a "core" measure of net wealth, the consumer balance sheet has never been stronger. What the Bank of England described in the Eighties as a ``glacier of liquidity'' overhanging the economy is still largely unthawed: monetarists in particular should be sceptical at the neat City consensus for 1998.
As hinted above, this balance sheet strength is not being neutralised by high real interest rates: the opportunity cost of spending today, rather than tomorrow, is if anything rather low when judged against recent experience.
Meanwhile, with the labour market tightening steadily, the incidence of unemployment is now just half what it was in 1993. And whereas in 1993 there were roughly eight potential applicants for each recorded job opening, now there are probably fewer than two. In some areas and occupations, indeed, employers are finding it increasingly difficult to recruit.
These developments should not have come as a surprise. There has been no sign recently of another productivity ``miracle''; and the sharp rise in labour supply which occurred as baby-boomers and married women entered the labour force is now behind us. Measured unemployment in fact peaked more than 10 years ago, and even when it does eventually begin to rise once more it is unlikely to rise as far as it did then.
Nor is it the case that job turnover has risen sharply. There is simply little support for the widely believed view that the average worker spends less time these days in any given job. In a recent meeting organised by the Centre for Economic Policy Research, Simon Burgess of the University of Bristol showed that there has been little change in job tenure since the 1970s.
"Jobs for life" may be putting the case a bit strongly, but with the average time spent in a given job running at 18 years for men, and 12 years for women, and with both these figures little changed since 1975, the existence of a new ``hire and fire'' culture must be questioned.
These figures are not as surprising as they first appear. The recent recession had its epicentre in the South-east, and involved the professional service sector to a greater extent than did the 1980-81 episode (still the benchmark against which many of us from the Celtic and Northern fringes judge recessions).
It also coincided with a more competitive environment in the civil service, media and academia. These are all areas which to a great extent dominate the day-to-day debate. But the unsung mass of workers are in practice much less exposed to these shifts; and it is still not uncommon for people to have been in the same job for as long as 30 or 40 years.
Even if turnover had risen sharply, insecurity needn't have risen with it: people often leave jobs voluntarily. Conversely, holding the same job for a great length of time is no guarantee of happiness. But the fact that chattering-class wisdom can be so wrong about something so fundamental warns again against accepting the consensus.
Of course, none of the above need prevent consumers from feeling overburdened or insecure. It may be human nature to believe that the future will be worse than the past - "things ain't what they used to be'' - even though the average household has never been as well off, in material terms, as they are today.
This hints perhaps at an existential unease better analysed with reference to the Brothers Karamazov than the writings of economists such as Kaldor, Kalecki or Keynes. But the financial markets and the Bank of England's Monetary Policy Committee would be well advised not to take the slowdown story for granted just yet. If consumer confidence were to rise to match households' material circumstances, 1998 could yet provide quite a surprise. Happy new year.
Kevin Gardiner is a senior economist and executive director at Morgan Stanley Dean Witter.
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