Let's enjoy being hauled along by America - while we can
Our economy should perform a bit like the US in coming months, if not in quite so gung-ho a manner
Friday 18 June 1999
More than this, there is the new cry that Britain is experiencing something similar to the US - a step change in the growth potential of the economy thanks to high productivity growth - coupled with something that is not so evident in the US; the ability by exporters to live with a highly-valued currency.
It is an intriguing prospect, for if true it would suggest that the UK can continue to out-perform continental European economies for some time, and that the faster growth for most of the last eight years has been as much the result of structural changes in the economy as a more positive cyclical performance. The trouble is the evidence both of a surge in productivity in service industries and the ability of exporters to live with a strong pound is very thin. Both ideas sound plausible, but they are terribly hard to prove.
What we do know is that both the US and the UK have experienced remarkably similar patterns in business and consumer confidence for several years, though our consumers and particularly our business people have been consistently less optimistic than the Americans (see graphs). By contrast, the German cycles, shown for comparison, are totally different. So in terms of attitudes the two countries seem very similar. This is reflected in the way in which sterling and the dollar have moved in tandem against the European currencies (and now the euro) and the yen.
But this only really tells us something about the degree of synchronisation of the cycles. It is helpful to have that information, for it suggests that while the US economy continues to bound along, we will be pulled along with it. You could argue that the present recovery in demand by UK consumers is mimicking the US, the main difference being that because US consumers did not have to contend with the sharp rise in interest rates we did last year, they did not have a winter wobble.
Maybe, if as expected the US Federal Reserve raises interest rates by up to 1 point in the 12 months, and if as expected we do not, we can retain our confidence even if Americans do not. But that remains to be seen; meanwhile the boomlet in the shops still feels quite fragile.
What we know very little about is where growth is coming from in Britain. There have been various attempts to unpick the US growth figures to see what proportion is accounted for by high-technology industries -the highest I have seen is three-quarters - but finding UK data is harder. Anecdotal evidence abounds: apparently last month's rise in industrial production was driven by a surge in production of mobile phones. But stories are no substitute for figures and we do not know enough about growth in the UK high-technology sector.
We know that a communications revolution is taking place for we can see the evidence in mobile phone sales and surging Internet connections. What we don't know is the impact of this revolution on the efficiency of the broad mass of business. But that is just the manifestation at a consumer level of a process that is also leading to profound changes in the production chain. There must be some productivity gains as a result of all this new investment. But we don't know what, where or how big these are.
As for living with a high currency, the evidence is almost equally unhelpful. Anecdotally, companies are saying that they can now live with a higher currency, as a CBI survey revealed, but when Lehman Brothers tried to identify why exporters seemed to be doing rather better under the high pound than might be expected, they drew pretty much of a blank.
Indeed they thought there may be a problem with the statistics and that we were over-recording exports. There seems to have been a surge in "phantom exports" - that is, exports which are reported to taken place, but which no-one claims to have produced and which do not appear in the imports of other countries. The problem applies particularly to exports to other EU countries, where the old trade recording system has been abandoned.
That won't be the first time the figures have been wrong in recent years, but does it matter? It would not matter too much unless a sudden deterioration in the current account some time in the future were to provoke a fall in sterling. The strong pound has been a key factor in the fall in inflation, so any fall, however welcomed by industry, might have to be offset by a rise in interest rates - just as the present rise is being offset by a decline in rates.
I suspect, too, that the strong pound has had an impact on consumer confidence, not because people notice that imported goods are cheaper in the shops but simply because there is a feelgood factor associated with perceived economic success. Certainly the weak euro has been blamed for poor consumer sales in Germany, but whether the relationship works the other way round is unproven.
So it is back to intuition, to anecdotes from commerce and industry, and to what feels to be happening in the shops. Intuition says that the new technologies must be making a significant contribution to growth and that companies would not spend money on new hi-tech kit if there were no payback. Anecdotes confirm that companies can to some extent live with a high pound, though there may be a problem in over-recording exports. And the news from the shops is distinctly better than even six weeks ago, though the rebound is still quite precarious.
So, yes, our economy can be expected to perform a bit more like the American one in coming months, but not quite in the same gung-ho manner. Then when the US economy eventually falters... no, let's not think about that just yet.
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