August need not be a wicked month, but it sometimes turns out that way. There will be no significant new economic initiatives announced by major governments and the central banks will just keep doing quietly whatever they have been doing. No surprises, then, or rather no intended surprises, for sometimes the thin trading of August leads to sudden market jolts that require a response.
But we are going into August at a bumpy time. Through the spring and early summer, worries about the major economies had faded. The US and UK were secure. True, the US economy had a negative first quarter as a result of dreadful weather, but it bounced right back afterwards. Here in the UK, the usual grumbles continued about the quality of the growth – too much home demand, stagnant pay, etc – but no one could deny that things were going along at a decent clip. Even in Europe the clouds lifted a little, with Spain in particular starting to recover. As a result, the so-called fear index, the VIX, which measures volatility by taking the price that people will pay to cover against a sudden change in share values, was at an all-time low. Meanwhile, US shares were at an all-time high. Investors brushed off the wars in Ukraine and the Middle East and focused instead on the US employment figures and profitability of Fortune 500 companies. The prospect of sanctions against Russia, and Argentina going bust, was greeted with a yawn.
It was not really until the middle of July that this insouciance started to fray. Share prices have fallen back; the gold price has risen, as has the VIX. For the record, the VIX was down to about 12 through most of the spring and it has now risen to 17. That is still below its long-run average of about 20, so you might say that while people are more twitchy than they were, they are perhaps not quite as twitchy as they should be. I don't think it makes a lot of sense to draw parallels with August 1914, for despite superficial similarities, the world is utterly different, not least because we have the folk memory of 1914. But the tacit assumption that all the variables would turn out towards the more favourable end of the scale was never realistic. Things go wrong.
So what should the rest of us be pondering as we head through August? Here are three propositions.
The first is that there is such a thing as the economic cycle, and we are prisoners of it. We kidded ourselves that good economic policy could minimise its amplitude. The slight dip in 2000/01, followed by a resumption of the boom, seemed to support that. Then came the mother of all recessions. Just because a recession of the depth 2007/08 has occurred only about every 70 years doesn't mean there cannot be another as bad for another 70, but it is most unlikely to occur. What is likely on past experience, however, is that there will be a modest recession sometime before 2020 – during the life of the next parliament, something that I fear is not even on politicians' radar. But it is likely too, by the same logic, that the present expansion will carry on for at least another two or three years. There is time to get private and public finances into decent shape, but not a lot.
The second proposition is that the great engine of economic growth, rising productivity, will become more evident. We don't know why productivity seems to have stopped rising in the UK and is rising only very slowly elsewhere. My own hunch is that we are under-measuring output. But even if that is right, it will not explain the whole shortfall. That is profoundly worrying because if the West cannot increase productivity – output per head – it can't increase living standards. This is not just a British issue, for it is pretty universal. There is plenty of contempt already about the incompetence of our leaders, and further declines in living standards are likely to increase that.
It is, however, improbable that human ingenuity, which continually and incrementally has been increasing productivity for the past 200 years, should somehow be failing to deliver the goods. The new technologies ought to be enabling us to do this as we, as users of them, learn how to do more with less. There is a practical issue for the UK that we need to increase productivity if this expansion is to continue without hitting bottlenecks, but the wider point that the developed world has to push forward the frontier of productivity is more important.
The final thing to ponder is political risk. To say that, is not to get at any particular politicians as such. It is simply to observe that political leaders elsewhere make mistakes. Sometimes they make the same ones over again, and my prime candidate for that is François Hollande making the same mistake as François Mitterrand 30 years earlier: heading off into a high-tax, high-spend, high-regulation blind alley, then reversing it after two years. The point is that there are mistakes ahead and we would be naive not to acknowledge that.