Hamish McRae: A year that proved the world is moving East

Economic Studies
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The Independent Online

As we near its end, it is time to take stock. Thinking back to the grim outlook a year ago, it seems that 2010 has not been such a dreadful year for the economy after all. There has been moderate growth, something around 1.8 per cent, which is well up on expectations –not just at the beginning of the year but as late as in the summer Budget. Unemployment is lower than expected. The world economy is clearly growing again, at something between 4 and 5 per cent a year, so that helps.

Our large companies are benefiting from that global growth, a point reflected by the stock market, which is decently up on the year, with the FTSE 100 index close to 6,000 – the highest point for the year. And all this is despite Britain having the largest fiscal deficit of any major economy – a deficit that, notwithstanding all the stuff about "the cuts", actually has yet to be cut at all.

So what should we gather from all this, aside perhaps from retaining our healthy distrust of all economic predictions? I suggest the first and overriding lesson is that the global economic cycle is extremely powerful. It would be great if we knew how to iron out the booms and slumps so that the world grew in a steady and sustainable way, but we are not clever enough to do that. As a result of the excesses that we in the West tolerated and actually encouraged, the slump was deeper than it need have been. But we are where we are and at least the march back up the hill has begun. It has begun for us in the UK but also for the whole of the developed world, including its most battered members, such as Ireland and Greece.

The second lesson stems from this. It is that if you accept that there is a powerful economic cycle, it follows that there will now be an assured economic recovery. The world economy is essentially self-healing. It can do self-harm too and half of the world has done so. But if the global economic cycle has clearly turned up – and I don't think there is any doubt about that whatsoever – then countries have to do pretty badly not to get some share in that growth.

That leads to a third point. It is that while we in Britain, or Europe or the US, think and talk of a global recession, actually what has happened is very much a North Atlantic recession. There was no recession in China. There was no recession in India. Indeed in the emerging world, taken as a whole, there was no recession, only a dip in the growth rate.

This has social, intellectual and political consequences, not just economic ones. A visit to India 10 days ago brought home to me how little credibility is now given to the economic ideas of the West. Indian growth is running at just under 9 per cent a year. No bank has had to be rescued. Why on earth should they pay any attention to us?

Of course, it is true that there are serious social and economic problems in India, as there are in China and throughout the emerging world. It is true, too, that living standards in the emerging world remain far below those of the West, and will continue to do so for another generation or more. But at a macro-economic level the game has been transformed. The intellectual leadership of the West has been lost.

But before you allow yourself to be too depressed by that, consider this: the world economy is more integrated that at any stage in its history, much more so than at the end of the last great burst of globalisation at the end of the 19th century. So the growth of this more balanced world accrues to all.

That is why the FTSE 100 index is doing reasonably well, for something like two-thirds of the earnings of these large quoted companies come from outside the UK, either in the form of exports or of the profits of overseas subsidiaries. Eventually that wealth, or at least a fair part of it, spreads through the country, either in employment or through the rise in the value of pension funds and so on. Share prices are a measure of confidence in the health of the world economy but they also contribute to it. The more confident the business community the more solid global growth is likely to be.

Put all this together and what might it say about this coming year? From our own perspective the dominant feature will be the way that fiscal retrenchment takes hold. We know it will inevitably depress living standards. Money has to come out of somewhere and consumption is two-thirds of the economy. It may be that real incomes will eventually recover – at the moment they are falling – but we cannot hope to have the surge in wealth that we experienced during the previous 15 years.

The growth numbers may not be too bad, but most of that growth will go to paying off debts, which may be good for our souls but never a bundle of fun to do.

For all the talk, the deficit remains huge

There was a harsh reminder of the troubling state of public finances yesterday, with the publication of the borrowing figures. In the previous financial year, the Government borrowed £105.1bn in the eight months from April to November. This year it borrowed £104.5bn. So, despite the growth in the economy, despite the rise in employment, despite the increases in tax rates, we have made virtually no progress in cutting the deficit.

It may be that the rise in VAT to 20 per cent, coupled with somewhat higher tax receipts from companies, will improve the numbers for January to March. But the plain fact is that faster growth is barely improving the fiscal position at all, or at least not yet. Not good.

h.mcrae@independent.co.uk

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