UK and Europe to the fore
Friday 30 July 1999
We are in one of those periods when the volume of economic data is obscuring the message that the data is supposed to convey. Worse, the data may be wrong, or at any rate somewhat misleading, so that any reading has to be cross-checked against what intuitively seems to be happening. Worse still, the data are obscured by the rapid structural changes taking place within the economy of both sides of the Atlantic.
This uncertainty is reflected in the financial markets. Equities on both sides of the Atlantic were troubled yesterday, and the dollar has been taking enough of a battering to push sterling up above $1.60 again. But the evidence here has also been one of bounce - a bounce in confidence that will later be reflected in a bounce in the rate of growth.
Start with those growth figures. This is rear-view mirror stuff, but we can now be virtually certain that the economy continued to grow through last winter. When the figures came out showing no growth in the January/March quarter, they seemed a bit implausible. Sure, there was a slowdown, but no growth at all? Now the statisticians have managed to discover a sliver of growth. Add that to other revisions, and they now reckon the economy grew by 1.2 per cent in the year to end-March, not the 0.7 per cent previously thought. I would be prepared to make a modest wager that in another three years' time when the figures have finally settled down (yes, they keep on revising and re-revising for years) that growth will have turned out higher still.
But there was undoubtedly a slowdown, and we can now see not only that it is over but that it was very useful. Optimism has now returned (see graph) to all three main sectors of the economy - manufacturing, services and finance. On the other hand, some of the pay pressure has been taken out of the jobs market, which will further take pressure off inflation in the medium term.
A few days ago I found myself discussing with a senior Treasury mandarin the average length of growth cycles in Britain and pondering whether, now that our present one was about seven years old, it could continue much longer.
"Ah," he said, "but we had our recession last winter - well actually not a recession, but a sharp slowdown - so maybe we can carry on growing now."
That seemed to me a bit cavalier at the time, but I now have a sneaking feeling that, in the short term at least, he might have been right. There is no necessary iron law that there have to be actual recessions: the last three - those of the mid-1970s, the early 1980s and the early 1990s - have all been caused by particular circumstances. What clearly does happen are periods of below-trend growth, and six to nine months of that may be enough to ease inflationary pressures.
So you could take the various bits of bullish recent data on the UK, including the surge in consumer borrowing and the strong house prices, and still believe there is no serious overheating yet. Sure consumers are borrowing, but net household savings are comfortably in their historical range. As for house prices, yes, they have risen sharply this year, but they are still very affordable, relative to average earnings, by past standards.
Big picture for the UK - there was a classic boomlet last year, but one that has been nipped in the bud by the rapid tightening of monetary policy.
Turn to the US and things are quite different. The cycle is more advanced, perhaps a year or more ahead of ours. The classic measures of overheating - the current account and the savings rate - are shining red alert. And now wage costs, which had been a benign green, have turned to amber. Had the Fed jacked up rates sharply 18 months ago the US would have had a slowdown then. But it didn't, and now the US faces the prospect of rising rates hitting an economy at the top of a boom. It is classic end-of-cycle stuff.
It is still possible that the US will come off the growth curve in a controlled and benign manner. If you spend time there (as I have recently) it is quite hard to imagine that anything might come along to stop the boom. But viewed from a distance it all looks rather more disturbing.
The main global economic story remains, I still think, the astonishing vitality of the US economy. But it is no longer the "Goldilocks" economy - not too hot and not too cold, but just right. And some time soon we may have a new story; the one which asks which countries will take over the baton of growth, which ones will be the new locomotives for the rest of the world.
In continental Europe the past few days have seen quite a sharp shift in sentiment. Both France and Germany have perked up, and sooner or later they will pull up Italy too. Include Scandinavia, the Netherlands and Spain, and there is a prospect of 275 million rich Europeans reaching for their wallets.
As a market this is roughly the same size as the US. The recovery won't be brilliant - European consumers simply won't spend like American ones, for many reasons including higher taxation and much higher unemployment - but any recovery will be enormously helpful next year.
Look elsewhere, and it is hard to pick other potential engines. Japan would be ideal, but nothing much will happen this year. South America? Too small to help much. India? Ditto - not, of course, in terms of population, but in terms of total impact on the world economy. Central Europe and Russia? Too small again. Emerging markets in East Asia? Still wobbly. China?
Ah, China. Reports suggest immense overcapacity, reflected in severe deflation, as producers dump products they are unable to export on to the home market. At best, China will have a neutral impact on the world economy; at worst it will export its deflation and become a drag on it.
The more you look at it, the more the UK appears adequately placed. The wonderful thing about Britons is that when they are given more money in their bank balances - for example by lower mortgage costs as interest rates fall - they go out and spend it. Contrast that with Japan, where they save anything spare, or the US, where they don't have anything spare and have to borrow.
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