Hamish McRae: Has a wind of recovery blown in from the East?

Click to follow
The Independent Online

The Chinese tail is wagging the world economy dog – and that may be to our own advantage in the months to come. George Osborne is out there at the moment and has been able to announce that London will become the first overseas centre for trading in the renminbi. (For the uninitiated, the renminbi is the name of the currency, like sterling, whereas the yuan, like the pound, is the principal unit of account.)

That makes sense because London is the world's largest foreign exchange market and the natural place to start trading it. Expect the market in New York to follow. But the much more important aspect of this move is not where it is traded but the way in which the renminbi is gradually making the transition to being a "normal" world currency, freely convertible into others, used for international payments and held by investors around the world.

The Chinese authorities have sought to slow down this transition. Having other people use your currency brings advantages – the US can manage to get the rest of the world to cover part of its debts by holding dollars – but it also brings disruption. The more a currency is held outside the country of origin, the more vulnerable the home country is to swings of investment sentiment. Look at the way in which Switzerland had to cap the rise in the Swiss franc as investors bought it, in search of a safe haven.

But as China's weight in the world economy increases, the balance of advantage shifts. There are advantages in having contracts written in your own currency rather than someone else's, and that is not practicable unless there is a stock of your currency around the world. When China becomes the world's largest economy, it will be pretty much inevitable for its currency to sit alongside the dollar in every regard, perhaps eventually taking over from it. See this as a step along that path.

What is happening in China matters to us in another and more immediate way. Its economy is slowing, but so far doing so in a controlled manner. The measures the authorities took last year to stop overheating seem to have worked as home consumption takes over from investment and export growth. One stunning number I saw yesterday was that retail sales were up 18 per cent – yes, 18 per cent – year on year. Conclusion: China goes on growing swiftly but some of the pressure it has put on world energy and other resources will ease.

That easing has brought inflation down from 6.5 per cent in July to 4.1 per cent now – lower than us. But we benefit because these lower energy prices will help cut our inflation, too. The decline yesterday of our CPI to 4.2 per cent seems set to continue.

That leads to a further point. Everyone accepts, I think quite rightly, that this year will be a difficult one for our economy. The only safe assumption is that the eurozone crisis will get worse, maybe very much worse, before it gets better. But if inflation here comes down, that has an immediate and direct impact on real incomes.

Over the past year, money incomes have rise by less than 2 per cent, so real incomes have fallen, depending on which inflation index you take, by between 2 and 3 per cent. But now the power companies are cutting prices, the oil price is stable, and the VAT increase of a year ago is coming out of the figures. So real incomes in the UK could start rising come the autumn.

The news flow from the US economy is still heading in the right direction and, as noted here, China is moving towards more balanced growth. So the world's two biggest economies are sustaining their recovery. Those who see the glass as half-empty will look across the Channel; those who see it as half-full will look to the US and, increasingly, to China.

The number of jobless people will rise, but these are the signs of hope to look for

We get unemployment figures today and they're expected to show a continued rise. That will be deeply worrying. But, within the detail of the figures, there will be a few things to look for.

One will be private-sector employment. The previous numbers showed that this was still rising, albeit no longer fast enough to offset the decline in public-sector jobs. If that number is still positive, it will also tell us something about the economy in recent months. If the private sector is still hiring, it must either be growing or anticipating growth. If not, then the prediction of the ITEM Club of unemployment reaching nearly three million early next year becomes rather more likely.

Another thing to look for will be the number of hours worked. It may seem a bit nerdy, but this number gives you a feeling for the underlying buoyancy of economic activity. The one modestly encouraging feature of the last set of figures was that, despite the rise in unemployment, the number of hours worked had risen a little.

And finally, there will be the politically charged issue of who is getting the jobs. Any information about rising employment of non-nationals and falling employment for Britons will be seized upon and twisted. Actually, we ought to be using it to ask tough questions as to why it seems to be that non-nationals are faring better in the job market, and then using the answers to find ways of getting more Britons into work.

h.mcrae@independent.co.uk

Comments