The long march back to full output continues. The UK economy has now regained a bit more than one-third of the ground lost as a result of recession. The third-quarter GDP figures, which showed growth of 0.8 per cent, an annual rate of more than 3 per cent, were welcomed and rightly so. We are pulling out of this recession a touch faster than we climbed out of the one in the 1980s, the one that most closely resembles the current cycle.
But even if the economy were to continue to grow at this pace, which is most unlikely, it would still be some time into 2012 before we got back to the last peak – and when we do, the harsh truth remains that we will have lost about four years' normal growth. There is still a long way to go.
That is not to downplay these figures. It is, after all, much better to have decent growth than to have stagnation or worse. Nor should the figures divert us into the argument as to whether the pace at which the spending cuts and tax increases are being imposed is too fast. We simply do not know whether the direct impact of these measures, which do take some demand out of the economy, is more than offset by their indirect impact, which comes in the form of cheaper borrowing costs and greater confidence. It is simply to make the point that it takes a long time to pull out of a serious recession and there is no magic wand that a government can wave to make it happen much faster – and if that seems too harsh a comment on the soon-to-be unveiled "growth strategy", so be it. More of that later.
Meanwhile, what is clear is that the Coalition has got itself into a position where if growth were to disappoint, it would have options. Yesterday the rating agency Standard & Poor's confirmed that the UK's AAA credit rating was secure. It had previously put it on "negative watch", a warning of a possible downgrade, and in about two-thirds of such cases a downgrade has indeed followed.
Now you may think it absurd that sovereign borrowers should be in thrall to the rating agencies, given that their mis-rating of US housing debt was one of the contributory factors in the banking crash. Quite a lot of us would agree with that. But we have to live in the world as it is, not as we would like it to be, and for the time being at least the rating agencies do matter. Losing the AAA rating would not have been a complete catastrophe but it would have meant that some would-be lenders would have been legally excluded from holding UK government debt. That would have pushed up the cost of credit, not only for the Government itself, but also for commercial and mortgage borrowers, too.
What the seal of approval from S&P does do, and this may be very helpful, is to buy the Coalition some space. The positive words about its policies inevitably increase confidence and that confidence is a stock from which the government can draw if it needs to. For example, were there to be a seriously soft patch in the economy during the run-up to Christmas, it could delay the rise in VAT. If there were good, practical arguments for spreading the spending cuts over a somewhat longer period it could probably get away with that. Paradoxically, because it has resisted the siren voices to pile up yet more debt, it will find it easier to borrow more should it need to.
So has the danger of a double-dip really receded? Well, a bit – and that is encouraging. But a pause in growth, even a few months of decline, is still likely in the first part of next year as the fiscal correction kicks in. Meanwhile take both the preening and the carping from the different sides of the political divide with all appropriate wariness.
And the growth strategy? Look, there are certain things that successive UK governments have done in the past, such as promoting flexible labour and product markets and encouraging business start-ups, that have created the conditions for decent growth. S&P commented favourably on that yesterday. But the idea that it will make any real difference to growth if the Government spends £200m promoting hi-tech industrial clusters or £40m on wind farm technology is absurd. That money has to be taken away in taxation and, hence, will drag on growth elsewhere.
Easing up planning restrictions on office building might make a bit of difference and reversing the curbs on skilled immigrants would certainly help. Reducing the admin burden on employing people would help, too. There is also a case for working with the banks to see whether the complaints of smaller businesses that they can't get credit are really justified, as the Government is doing. So there are things to be done. But what is happening is mostly tokenism and it is sad to see the Coalition slithering into this trap.
More bad news for the President
If house prices here are wobbling a bit, in the US they are really worryingly soft. Here the injection of cash into the economy by the banks not only put a floor under prices but helped nudge them up, yet in the US broadly similar policies have failed to help much. Prices stopped falling last year, then went sideways, helped by credits for new buyers, but now have been falling again for the past two months. Mortgage applications are at a 13-year low.
All this is bad news for President Obama ahead of the midterm elections next week but more substantively it is bad news for consumer confidence, which is exceptionally low compared with what it was at this stage in previous cycles. The ray of hope is that once there is a firm floor under prices, the market could snap back smartly. But that may be 18 months away.Reuse content