Hamish McRae: Amid the shocks, hopes of growth bring comfort

Economic Studies
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The Independent Online

The Budget is theatre; the economy is reality. There is the inevitable showbiz element to today's, the first conventional one – as opposed to the emergency Budget last June – of the Coalition. We get an update on the numbers, for remember, the job of any Budget is to set out projected spending and receipts. But we get them wrapped in the cloak of political rhetoric.

The Government is variously providing prudence with a purpose, protecting families through the recovery, or maybe just sorting out the mess the other guys left. And then there will be the little flourish, the tax on executive jets, whatever, that matters not one whit in the broad order of things but which is aimed to catch the headline and divert attention from what is really going on.

This year, more than ever, the numbers will matter more than the words. And those numbers will be determined rather more by what is happening in the world outside than what is happening in our little island. So let's start with that.

The world economy is at an absolutely fascinating juncture. The big picture is a comforting one. The developed world, and in particular the United States, is experiencing an increasingly secure recovery. This recovery is still in its early stages and many countries have not yet got back to the peak of output that they reached in the early part of 2008. The US is just about there but Europe, including the UK, is still some way off.

At this stage you are always vulnerable to setbacks and it would be very odd if there were not some more of those. Some of the fringe economies are still struggling but just about every economy is projected to show some growth this year. The more growth you get in one chunk of one economy the more that growth spreads to other chunks in other ones.

Meanwhile, the two giants of the emerging world are coping, so far successfully, with a quite different problem: how to keep growth under control, to brake gently and smoothly without bringing things to a juddering halt. So China, which grew by more than 10 per cent last year, is tightening on its bank lending and has set a lower target rate of growth in its new five-year plan. India, which is growing at nearly 9 per cent a year, is struggling to get inflation down.

It is a bit of a high-wire act, this rebalancing of the world economy, and anyone who says they are totally confident that the world will pull it off is, well, liable to make an ass of themselves. We should always remember too that there are parts of the world that are in danger of being left behind. But so far both the recovery in the West and the damping down in the East seem to be more or less on track.

This is a relief because the world economy has had two shocks from what has happened in Japan and in North Africa and the Middle East. It seems wrong to talk of either in economic terms because these are in their very different ways both human tragedies. But they do have economic consequences. Japan will lose something like 5 per cent of GDP, which is huge, and while the bulk of this loss will be carried by Japan itself, there will be unforeseeable impact elsewhere. Japan is a core element of the global supply chain.

The effects of Libya, Bahrain, Yemen and elsewhere are not at all quantifiable because we have no idea yet how far the unrest will go and how long it will last. The plain fact, though, is that world energy prices will be higher than they otherwise would have been and in the UK we are already seeing how more money spent on energy means less money to spend on other things.

In short, these shocks both diminish the stock of global wealth and disrupt the capacity to generate new wealth. As yet, however, global growth seems intact and all our experience is that economic growth enables us all – countries, companies, families, everyone – to work through our difficulties and recover from our mistakes. Of course that growth has to be environmentally sustainable and it has to be real, rather than puffed by borrowing.

All of which brings us back to Britain. We are promised a growth agenda today. But without wanting to be dismissive of efforts by politicians and civil servants, it is only realistic to reckon that no budget will make a huge difference to growth either way. Looking at things globally, there have been budgets that have had a transformational effect, of which the most notable were those of Manmohan Singh in India in the early 1990s.

He put fiscal policy on a sound financial basis and started to sweep away the bureaucratic controls on business. India then began its great run of growth. There are some lessons for George Osborne here but since we are not in as dire a position as India was then, the scope for upside is not as striking. There are barriers to entrepreneurial activity in the UK but they are nothing like those that Indian business faced 20 years ago.

We have at the moment an uneven backcloth. On the one hand there is strong manufacturing output and exports, coupled with solid private-sector employment growth. Over the past three months private sector hiring has more than offset public-sector firing. On the other hand, we have really worrying inflation and a still dreadful fiscal deficit. Those inflation and deficit figures yesterday were both at the worse end of the expected range.

It is always wrong, though, to focus on the latest set of statistics; it is the broad direction of the numbers that matters. And if the world economy continues growing reasonably for the next five years, that broad direction should give us some comfort. The task for us all is to use this global growth to get ourselves into decent financial shape before the next downturn. Simple, eh?



h.mcrae@independent.co.uk

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