Don't take the slowdown story for granted just yet

Kevin Gardiner on reasons to be cheerful

The British forecasting fraternity is unanimous in predicting that the UK economy will slow in 1998. Pessimists expect growth of less than 2 per cent, which - given the likely strength of the economy as the year begins - implies near-recessionary conditions for much of the year.

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.

Suggested Topics
Start your day with The Independent, sign up for daily news emails
Floyd Mayweather will relinquish his five world titles after beating Manny Pacquiao
Arts and Entertainment
tvGame of Thrones season 5 ep 4, review - WARNING: contains major spoiliers!
Tottenham legend Jimmy Greaves has defended fans use of the word 'Yid'
Life and Style
Arts and Entertainment
The Ridiculous Six has been produced by Adam Sandler, who also stars in it
filmNew controversy after nine Native American actors walked off set
Life and Style
Google celebrates Bartolomeo Cristofori's 360th birthday
techGoogle Doodle to the rescue
ebooksA celebration of British elections
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Claims Administrator

£16000 - £18500 per annum: Recruitment Genius: This is an excellent opportunit...

Recruitment Genius: Senior SEO Executive

£24000 - £28000 per annum: Recruitment Genius: A Senior SEO Executive is requi...

Recruitment Genius: Online Customer Service Administrator

£16000 - £18000 per annum: Recruitment Genius: An Online customer Service Admi...

Recruitment Genius: Digital Marketing Executive

£18000 - £22000 per annum: Recruitment Genius: This global, industry leading, ...

Day In a Page

Fishing for votes with Nigel Farage: The Ukip leader shows how he can work an audience as he casts his line to the disaffected of Grimsby

Fishing is on Nigel Farage's mind

Ukip leader casts a line to the disaffected
Who is bombing whom in the Middle East? It's amazing they don't all hit each other

Who is bombing whom in the Middle East?

Robert Fisk untangles the countries and factions
China's influence on fashion: At the top of the game both creatively and commercially

China's influence on fashion

At the top of the game both creatively and commercially
Lord O’Donnell: Former cabinet secretary on the election and life away from the levers of power

The man known as GOD has a reputation for getting the job done

Lord O'Donnell's three principles of rule
Rainbow shades: It's all bright on the night

Rainbow shades

It's all bright on the night
'It was first time I had ever tasted chocolate. I kept a piece, and when Amsterdam was liberated, I gave it to the first Allied soldier I saw'

Bread from heaven

Dutch survivors thank RAF for World War II drop that saved millions
Britain will be 'run for the wealthy and powerful' if Tories retain power - Labour

How 'the Axe' helped Labour

UK will be 'run for the wealthy and powerful' if Tories retain power
Rare and exclusive video shows the horrific price paid by activists for challenging the rule of jihadist extremists in Syria

The price to be paid for challenging the rule of extremists

A revolution now 'consuming its own children'
Welcome to the world of Megagames

Welcome to the world of Megagames

300 players take part in Watch the Skies! board game in London
'Nymphomaniac' actress reveals what it was really like to star in one of the most explicit films ever

Charlotte Gainsbourg on 'Nymphomaniac'

Starring in one of the most explicit films ever
Robert Fisk in Abu Dhabi: The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers

Robert Fisk in Abu Dhabi

The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers
Vince Cable interview: Charging fees for employment tribunals was 'a very bad move'

Vince Cable exclusive interview

Charging fees for employment tribunals was 'a very bad move'
Iwan Rheon interview: Game of Thrones star returns to his Welsh roots to record debut album

Iwan Rheon is returning to his Welsh roots

Rheon is best known for his role as the Bastard of Bolton. It's gruelling playing a sadistic torturer, he tells Craig McLean, but it hasn't stopped him recording an album of Welsh psychedelia
Russell Brand's interview with Ed Miliband has got everyone talking about The Trews

Everyone is talking about The Trews

Russell Brand's 'true news' videos attract millions of viewers. But today's 'Milibrand' interview introduced his resolutely amateurish style to a whole new crowd
Morne Hardenberg interview: Cameraman for BBC's upcoming show Shark on filming the ocean's most dangerous predator

It's time for my close-up

Meet the man who films great whites for a living