Economics : Good times aren't just around the corner
Sunday 02 June 1996
For the Government, though, a revival of the so-called feelgood factor is crucial as far as its electoral fortunes are concerned. It certainly seems to think, if its adver- tising is anything to go by, that voters are still swayed by cash-in- pocket arguments rather than by voter dissatisfaction with other non- economic aspects of Conservative rule over the past decade or so.
But back to the economics. On the face of it, the Organisation of Economic Co-operation and Development's report on the UK economy last week received a warm enough welcome in the press with what were regarded as favourable forecasts on economic growth and inflation. Indeed, the OECD regards Britain as one of the more flexible economies in Europe on the back of labour market and competition policy reforms. Flexibility at what cost, though, and what do we mean by flexibility?
For many people, the Government's policies have meant a collapse in small businesses as well as a high degree of job insecurity. About 75 per cent of new jobs being created are part-time rather than full-time. Rather than being the outcome of personal choice in an economy that is dynamic and thriving, this seems to be the outcome of an economy that looks struggling and fractured. Male unemployment stands at 10 per cent of the workforce, while the number of people who are labelled as long-term unemployed stands not far short of a million. Actual jobs growth, especially in manufacturing, is declining.
Indeed, the OECD in its latest forecast is only catching up with the bulk of City forecasters like myself who have been predicting this year's economic growth at 2 per cent. Certainly, the economic picture is mixed. While the service sectors seem to be doing reasonably well, manufacturing is flat on its back. The recent survey from the CBI showed that stock levels are at their highest since 1991 while order books are at their lowest since 1993.
There are plenty of commentators who argue that manufacturing doesn't matter and that Britain has been a service-sector economy for some period of time. I do not find this line of argument convincing. Having a healthy manufacturing sector is important because of the significant effect it has on job creation in regions where traditionally there have been economic prob- lems. A shrinking manufacturing sector is also an indicator of structural and competitive problems.
Some readers might have seen the league tables of competitiveness published by the World Economic Forum and the International Institute for Management. While such league tables have to be treated with a pinch of salt, there is no doubt that Britain's long-term productive potential has been badly damaged by two recessions over the past 15 years, economic policies that have been detrimental to the real economy, and a Government philosophy that has been hostile to the manufacturing sector.
In order to improve productive potential, you have to invest. We simply have not done this - either in plant and equipment or in human capital. Britain has one of the worst educational, skills and training records of all the major economies.
In sharp contrast, America's economic recovery since 1991 has been based on a massive surge in investment that has helped create millions of jobs since 1992 as well as halving America's budget - quite an achievement.
Britain seems unable to break the mould of relying on consumer spending as the exclusive driving force in the economic cycle. It is a driving force (as we have found from bitter experience) that usually ends in tears. Investment during the "current recovery" that Britain has experienced since sterling left the ERM in 1992 is minuscule.
As a result, the unbalanced nature of any recovery looking toward 1997 is going to pose problems for the trade gap, which is already wide despite sluggish levels of domestic demand. My guess is that a worsening of the trade gap is likely to be a key feature over the next 12 months, especially with sterling looking a little stronger on the foreign exchanges at the moment.
For the time being, though, the City's main focus is on interest rates. The upcoming meeting between Mr Clarke and Mr George is not expected to result in an interest rate cut. In fact, the dead hand of the Bank of England seems to be against any further cuts in interest rates for fear of missing the Government's inflation targets. But it strikes me as somewhat odd that for an economy that is only growing at a 2 per cent rate we should be thinking that there is little scope for any further loosening of monetary policy. Indeed, a few City pundits believe that interest rates will have to go up next year.
My guess is that the Chancellor and the Governor of the Bank of England have missed the boat on all of this. Later in the summer, the US Federal Reserve might raise interest rates and this is already proving too much for Wall Street where the Dow Jones looks pretty shaky. In Europe, the Bundesbank does not look as though it is ready to reduce German interest rates any further. In my view, what we should have done here is to cut interest rates much further as Patrick Minford - a lone voice amongst the Chancellor's Wise Men - has previously argued.
Politics is already featuring as a hot topic for the City during the summer. Few investors believe that the Government can hang on until next spring given its precarious majority. However, there are few investors who do not believe that there will be a Labour government.
The main issue is the size of Labour's majority. At the moment, the market is discounting about 60 seats and many fund managers believe the bigger the majority, the better it will be for the markets. This might sound somewhat perverse given the traditional Conservative orientation of the City, but Labour is regarded as fairly orthodox even though there are residual concerns about its taxation and spending plans. The worst case scenario for the City is a minority Labour government dependent on the support of the "left".
EMU is also a concern. Labour's Treasury team is in favour, but this obsession with exchange-rate targeting has never proved to be to Britain's advantage. There are many who believe that Britain would be best out of EMU given that we are already the biggest recipient of inward investment in Europe. EMU would land us with higher social and regulatory costs, lumber us with persistently high levels of unemployment - given the deflationary bias of fixed exchange rates - and leave the conduct of economic policy in the hands of unelected bankers and bureaucrats.
Unfortunately, Labour chancellors usually end up as the slaves of conventional wisdom and orthodox opinion. But EMU is a huge leap in the dark, and huge leaps often result in nasty accidents.
q Neil Mackinnon is chief economist at Citibank; Hamish McRae is on holiday.
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