Recession? The odds are against it
The economy is unlikely to go bust, but sectors from building to debt collection are already grappling with the downturn
Sunday 16 August 1998
He meant to be reassuring. In other words, he was saying, a recession was quite unlikely.
On the same day down at the local betting shop they were offering the same odds: 8-1, against Tiger Woods winning the US PGA golf. And as everyone knows, Tiger Woods is quite likely to win any tournament he enters.
Looked at this way, a recession is as likely to happen as Tiger Woods winning the current major golfing tournament. Or as Mervyn King, a keen Aston Villa fan, might find if he looked at the latest football betting odds, it is five times more likely that there will be a recession than it is that Aston Villa will win the Premiership.
But in a week when the economy both at home and overseas has dominated the news, what are the chances that Britain is heading for recession?
First, it's important to define the term. If we mean two quarters of negative growth in GDP, we still seem to be a long way from reaching that point. Most forecasters see growth slowing down, but not a prolonged period of zero or negative growth.
The Bank of England's Inflation Report contains a survey of 30 outside forecasters which shows that 71 per cent expect 1-4 per cent growth this year, 69 per cent expect the same outcome next year, and 77 per cent in the year 2000.
The Bank itself, in its famous colour-coded fan graphics (red for inflation, green for growth), shows the economy slowing until the first quarter of next year, and then recovering. This is a pretty mild slowdown. If it is achieved, it would qualify for the term a "soft landing".
This is what an economist might well describe as a recession: a period of below-trend growth. But the word recession has come to be associated with the economic busts of the early 1980s and early 1990s. In both cases, there was a deep, damaging and prolonged plunge in national output. Unemployment soared to nearly 3 million.
In spite of all the agony being expressed by manufacturers, and the high-profile job losses at Siemens, Rover and BOC, we are not on the brink of a rerun of the two previous crashes. Indeed the one major piece of economic news published this week unexpectedly showed that unemployment is continuing to fall and employment is continuing to rise. Depending which figure you believe, unemployment fell 26,000 in June or 62,000 in the latest quarter.
Unemployment figures, of course, have to be treated with a great deal of caution. They are a lagging indicator telling us more about what was happening at the beginning of the year rather than now. Nevertheless, there is no sign yet that the labour market is about to take a really nasty turn for the worse. It still seems to be the case that while manufacturing is feeling the squeeze and cutting back, the service sector continues in robust health.
So what is the likelihood of things turning out to be far worse than is currently looking likely?
On the international front, the omens have become worse. There is no sign that the economic meltdown in the Far East has run its course. In Japan, the new prime minister has yet to impress, and there are renewed worries in Hong Kong, Malaysia, and elsewhere. The threat of a devaluation in China refuses to go away - a move that could unleash another bout of currency turmoil.
The week's developments in Russia have also unnerved the markets - and again the main problem is that there is no sign that the country's economic difficulties will be quickly resolved.
Just why Wall Street and London are taking these threats so seriously now may be a function of the silly season, or holiday time over-reaction, but there is a certain irony that capitalist markets now look so anxiously at events being played out in Peking and Moscow.
At home, the recession gloomsters continue to concentrate their criticism on the Bank of England, Mr King and other members of the Bank's Monetary Policy Committee. This is unfair for a number of reasons.
Far from squeezing the life out of the economy, the Bank has actually raised base rates only once - and then by only 0.25 points - in the past nine months. People urge it to clarify that interest rates have peaked - but it cannot do that.
Nor is it the Bank's fault that it has been given a mandate to hit a 2.5 per cent inflation target. The Bank did not choose that target and it may be the wrong one. Perhaps when the Chancellor returns from his holidays he should take another look at this. After all, on the accepted European measure, UK inflation is only 1.7 per cent.
The inflation news in the UK continues to be relatively good. In the past week, average earnings growth fell back, and we all know which way share prices have headed. The housing market is subdued and producer price inflation non-existent. And yet the Bank still agonises over an inflation measure which is boosted by tax increases and seasonal food volatility.
The red inflation fan diagram in the latest Inflation Report shows it will be well into 2000 before the Bank expects to hit its target. If this is right, the Bank cannot justify relaxing monetary policy. On that basis, the pound is likely to stay strong.
There are recessionary forces at work both at home and overseas, but we have not yet reached a stage where the outlook is as bad as many make out.
Yes, British exporters are suffering; yes, the high-profile job loss announcements will become more common; yes, the economy is slowing down; and yes, the international picture is uncertain. But so far, this is no more than a cyclical slowdown.
If you were laying odds, betting on a full-blown economic bust would still be putting your money on an outsider - perhaps with as much chance as of Tottenham winning the championship. Possible - but unlikely.
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