Of course, the two are closely related. If Britain is indeed flirting with recession, as the mainline City forecasters are predicting, then rates will come down very swiftly. If not, the fall will still occur but will take longer.
The puzzle is that the UK data do not add up. Something is happening that we don't yet understand. On the one hand, surveys of business confidence point to recession and the economy did seem to slow during the last quarter of last year, but the number of people in jobs and the hours being worked continue to rise.
We will get some direct information on interest rates this afternoon, for the Bank of England's Monetary Policy Committee is meeting now. But whether we get the next little bit off rates this month or next is less important than the fact that the downward trend is clearly quite secure.
You have to have an extraordinary faith in the powers of monetary policy to believe that it makes much difference whether one-quarter or half a percentage point off the cost of short-term funds is going to make much difference to the trend in the economy. It is much more important that people are convinced that money will continue to become cheaper and that businesses see sterling continuing at a reasonable level. The case for the nibbling, quarter-point cuts is as much their indirect impact on confidence as their direct impact on the cost of funds. But a month or two of delay in rate cuts will not do much harm.
The bigger puzzle is whether an economy with gloomy businesses can really continue growing. Look at the top graph. The economics team at Tokai Bank have fitted the trend in business optimism, as measured by CBI surveys, with the actual performance of the economy going back almost 20 years. It is a neat piece of work, carrying the obvious message that we are in for a recession of similar magnitude to those of the early 1980s and early 1990s.
When you see something like that, you have to sit up and think, for the implications are pretty alarming. Whatever arguments you make about the CBI over-representing the views of big business, the impact of deflation on profits, or the particular difficulties faced by exporters, the plain fact remains that our business community appears to be as fearful of the future as it was when we headed into the last two recessions. And they were very unpleasant.
Now look at the lower of the two graphs. Not only has employment been rising almost every month for the past four years, but the number of hours worked has been climbing steadily too. As the Deutsche Bank economics team, which highlighted those figures, puts it: "The current pattern of data is truly mysterious." These profoundly gloomy business people are busily taking on more staff, and they are not doing so out of altruism or some desire to encourage social cohesion. They must be doing so because there is a lot of work to be done.
There is a commonsense way of solving a bit of the puzzle. The clue is that most of the additional employment is part-time, and that which is not seems to be on short-term contract. So these gloomy businesses are coping with the workload not by staffing up on a permanent basis, but by pulling in temporary labour. The managers have been told that they cannot hire any new people, but they still have to get the work done. So they hunt around for the assorted army of temps, contract workers, interns and students.
The fact that students now have to pay fees has probably increased the supply of part-time workers. And anecdotally there is, at least in the south of England, enormous demand for them. Our labour force is becoming much more like the American one.
But that does not solve the core of the puzzle, which is that hours worked seem to keep on rising, despite the most recent evidence that the service sector may be following manufacturing and seeing a fall-off in demand. I can see only three possible explanations.
The first is that something has been changed by deflation. Companies are experiencing a phenomenon they have never experienced before: a relentless, grinding pressure on prices that looks like carrying on and on and on. True, their raw material prices are falling even faster, but that may make them feel even more vulnerable. These input prices might come up; and even if they don't, maybe the squeeze felt by, say, the oil companies will be extended further along the production chain. This might explain the excessive gloom of the CBI members: it is deflation rather than recession that is spooking them.
The second explanation is that there is a lag in the employment data. These figures are unlikely to be wrong, because they are measuring hard numbers. But lags are the bane of economists. Maybe both employment and hours worked will start to fall in the next few months, or maybe they have already started to fall in the past few weeks and that has not yet come through in the statistics.
The third possibility is that the economy is actually still expanding at a decent clip and will carry on expanding, albeit more slowly, through the rest of this year. In other words the output data, which show some signs of slowing, is wrong.
It is extremely hard to measure the output of many service industries. You can count the number of people flying through Heathrow, but you cannot count the informal economy - the economy that takes place outside the tax net. We are currently switching to self-assessment, which is boosting government revenues because, in effect, two years of tax are being collected in one year. But maybe the disagreeable experience of that is giving an incentive to the army of self-employed to shift a bit more of their activities into the informal economy. We just don't know.
At any rate, predictions of zero growth this year are now common in the City. My guess is still that the slowdown this year will be less marked than the markets at present think, although more marked than the Chancellor thought last November.
The greater test, for all sorts of reasons, will be the year 2000. But we have to get there first.Reuse content