When economic data looks too good it usually is. Let's accept that point as far as the latest numbers showing UK growth at 0.5 per cent, or an annual 2 per cent rate, during the three months to the end of September go. But when data looks too bad, the same argument applies, and the difficult thing in the coming months will be to separate the discouraging noise about the economy – and there will be a lot of that for obvious reasons – from the underlying trend.
Three points as we march through the next difficult six months. The first is that we won't know the detail of what has been happening for two or three years because the revisions to data take that long to come through. We have recently had revisions that show the boom was even greater than estimated at the time, with the effect that the last peak of output was even higher. You can look at that in one way and say it will take us even longer to get back to that peak; alternatively you could say that activity was artificially boosted by excess borrowing by private and public sectors. We were never as rich as we thought we were.
But now the wealth being generated is more sustainable, with incidentally the balance of payments deficit now its narrowest since 1997.
The second point is that these latest figures are consistent with an economy growing at around 1 per cent a year, maybe a little more but not much. That is not fast enough to stop unemployment rising, as the economy's natural growth rate is somewhere between 2 per cent and 2.5 per cent. While the private sector is still creating jobs, the rate at which it has been doing so is now too slow to offset the losses in the public sector. A year ago it was creating three or four jobs for every one lost; in recent months it has only been creating one job for two lost. On top of this, the forward-looking indicators such as the surveys of manufacturing opinion are disappointing. That in turn leads to the third point: what in the light of the near-certain move back into recession on the Continent can we do to protect ourselves?
We have to assume that exports will be weak so the question is whether anything can be done to support domestic demand. Slow down the deficit-cutting programme? That might sound seductive and some people advocate it. But there is no assurance that such a policy would increase growth; indeed by undermining confidence it might have a perverse effect. The overriding lesson of recent weeks is surely that the UK has managed somehow or other to achieve "safe haven" status as far as global markets are concerned.
If the Government can push its borrowing costs down even further that releases more resources that can go into the real economy, while still sticking to the overall borrowing numbers. There is a little bit of wriggle room in the public finances; expect that to be used.
But the basic support for the economy through the winter has to be private-sector services. Actually services output, which is less dependent on Europe than manufacturing, was up 0.7 per cent in the third quarter and that sounds even better if you annualise it at 2.8 per cent.
Indeed, it looks as though September was particularly strong and that should lead to some carry-over into October, maybe November. So even with a poor Christmas we should still see a bit of growth in the final quarter.
As Simon Ward of Henderson points out, talk of the economy flat-lining over the past year is wrong; it has just been growing very slowly. Henderson, Nomura and a number of other forecasters still expect the UK to escape recession. What happens to services in the coming months will depend crucially on real incomes and house prices.
If the squeeze on the former eases as a result of the long-expected decline in inflation and if the new injection of quantitative easing from the Bank of England supports the latter, then we do scramble through without a return to recession. But it will be a scramble; there is no getting away from that.
Inspiring banknotes from a small island
We get a new £50 note today celebrating the 18th century business partnership of Matthew Boulton and James Watt. The entrepreneur and the engineer ran the Soho works in Birmingham, at the time the largest manufacturing plant in the world.
Watt was of course famous for the steam engine but the plant made a huge range of other products, from toys to candelabras. The Soho Mint made coins not just for the UK but for a range of European countries and for the US.
So the new note should remind us that you need two skills to run a business – the entrepreneur who has the commercial vision and can take the risks, and the engineer who turns innovative ideas into products that work.
But the new note is innovative in its own way as it has several anti-counterfeiting measures, notably a window with images that move up and down and from side to side when you tilt or twist the note.
If sterling's new safe haven status makes £50 notes more attractive to that segment of European society that prefers cash, maybe we have an export product too.
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