Economics : Good times aren't just around the corner

As the prospect of summer weather comes through in fits and starts to cheer us all up, there have been plenty of forecasts and prognostications over the past week trying to convince us all of better times ahead. The problem is that, so far anyway, they have been no more than forecasts. For many people up and down the country it's simply a case of "recovery, what recovery?"

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.

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

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

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Sales Executive / Foreign Exchange Dealer - OTE £40,000+

£16000 - £40000 per annum: Recruitment Genius: A Foreign Exchange Dealer is re...

SThree: Experienced Recruitment Consultant

£20000 - £40000 per annum + OTE + Incentives + Benefits: SThree: Established f...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE 40/45k + INCENTIVES + BENEFITS: SThree: The su...

Recruitment Genius: Collections Agent

£14000 - £16000 per annum: Recruitment Genius: This company was established in...

Day In a Page

The long walk west: they fled war in Syria, only to get held up in Hungary – now hundreds of refugees have set off on foot for Austria

They fled war in Syria...

...only to get stuck and sidetracked in Hungary
From The Prisoner to Mad Men, elaborate title sequences are one of the keys to a great TV series

Title sequences: From The Prisoner to Mad Men

Elaborate title sequences are one of the keys to a great TV series. But why does the art form have such a chequered history?
Giorgio Armani Beauty's fabric-inspired foundations: Get back to basics this autumn

Giorgio Armani Beauty's foundations

Sumptuous fabrics meet luscious cosmetics for this elegant look
From stowaways to Operation Stack: Life in a transcontinental lorry cab

Life from the inside of a trucker's cab

From stowaways to Operation Stack, it's a challenging time to be a trucker heading to and from the Continent
Kelis interview: The songwriter and sauce-maker on cooking for Pharrell and crying over potatoes

Kelis interview

The singer and sauce-maker on cooking for Pharrell
Refugee crisis: David Cameron lowered the flag for the dead king of Saudi Arabia - will he do the same honour for little Aylan Kurdi?

Cameron lowered the flag for the dead king of Saudi Arabia...

But will he do the same honour for little Aylan Kurdi, asks Robert Fisk
Our leaders lack courage in this refugee crisis. We are shamed by our European neighbours

Our leaders lack courage in this refugee crisis. We are shamed by our European neighbours

Humanity must be at the heart of politics, says Jeremy Corbyn
Joe Biden's 'tease tour': Could the US Vice-President be testing the water for a presidential run?

Joe Biden's 'tease tour'

Could the US Vice-President be testing the water for a presidential run?
Britain's 24-hour culture: With the 'leisured society' a distant dream we're working longer and less regular hours than ever

Britain's 24-hour culture

With the 'leisured society' a distant dream we're working longer and less regular hours than ever
Diplomacy board game: Treachery is the way to win - which makes it just like the real thing

The addictive nature of Diplomacy

Bullying, betrayal, aggression – it may be just a board game, but the family that plays Diplomacy may never look at each other in the same way again
Lady Chatterley's Lover: Racy underwear for fans of DH Lawrence's equally racy tome

Fashion: Ooh, Lady Chatterley!

Take inspiration from DH Lawrence's racy tome with equally racy underwear
8 best children's clocks

Tick-tock: 8 best children's clocks

Whether you’re teaching them to tell the time or putting the finishing touches to a nursery, there’s a ticker for that
Charlie Austin: Queens Park Rangers striker says ‘If the move is not right, I’m not going’

Charlie Austin: ‘If the move is not right, I’m not going’

After hitting 18 goals in the Premier League last season, the QPR striker was the great non-deal of transfer deadline day. But he says he'd preferred another shot at promotion
Isis profits from destruction of antiquities by selling relics to dealers - and then blowing up the buildings they come from to conceal the evidence of looting

How Isis profits from destruction of antiquities

Robert Fisk on the terrorist group's manipulation of the market to increase the price of artefacts
Labour leadership: Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea

'If we lose touch we’ll end up with two decades of the Tories'

In an exclusive interview, Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea