Hamish McRae: The world is heading for a long recession. So what can we do?

Click to follow
The Independent Online

'This is going to be a long haul: my guess is that real recovery is more likely to be in 2004 than 2003'

'This is going to be a long haul: my guess is that real recovery is more likely to be in 2004 than 2003'

I was walking to the fishmonger's shop yesterday morning when a friend hailed me across the street. "Tell me," she asked, "how bad is this recession going to be?"

In April last year, she had stopped me with a slightly different question. That time, she was worried about the first signs of a stock market crash, starting in the high-tech sector. Could this lead to a recession? So you see the world has clearly moved on.

Every week, there comes new evidence that a global recession is looming. It is not certain, and some people in both the public and private sectors are still in denial of the dangers. But the balance of probability is that there will be something between (at best) two or three years of very slow growth and a recession akin to that of the early 1990s. If that sounds familiar, it is what I wrote 15 months ago. It just was rather less fashionable to say it then than it is to say it now.

OK, so it is not going to be great fun. What can we as a country do about it?

One of the intriguing aspects of this downturn is that the UK seems to be less threatened than most other countries. Tony Blair feels able to lecture our Continental partners about the need to reform. Large parts of the US economy have ground to halt and all those bombastic company chiefs who boasted of ever-rising profits are now sacking staff and quite often facing the sack themselves. As for Japan; at least the country is no longer in denial but that is because it is so glaringly obvious that it is back in recession.

By contrast, we seem sort of OK. Sure, manufacturing industry is having a tough time but the economy as a whole grew at an annual rate of 1.2 per cent in the second quarter, maybe more when they revise the figures, despite foot-and-mouth and the slump in travel and tourism. Consumers are still confident, house prices still rising. We may be able to manage through recession better than most. But to do that we need to get three types of policy right: monetary policy, fiscal policy and structural policies.

Monetary policy was subcontracted to the Bank of England by Gordon Brown immediately after he took office and has, since then, broadly been a success. We will get the latest decision on interest rates from its monetary policy committee tomorrow. There is a genuine problem at the moment, as you could make a good argument for cutting rates, increasing them, and keeping them the same. The case for cutting is that monetary policy needs to offset the growing danger of a collapse in international demand. The case for increasing them is that consumer spending here is still very strong, public spending is about to surge and the widening current account deficit could undermine sterling. And the case for doing nothing is that there is so much uncertainty that it is best to wait and see what turns up (or more probably, down).

The good news is that at least we still have control over monetary policy, unlike poor Germany. It is saddled with too-high interest rates by the European Central Bank because the ECB has to have a policy that suits the whole of the eurozone, which has been growing much faster than its largest member. My guess is that the UK is at least as likely to have appropriate monetary policy through the recession as anywhere else and certainly more appropriate than most of the Continent and Japan.

Fiscal policy: here, a big spending boom is about to get under way, with spending rising faster than output for the first time since Labour came to power. You might imagine that this is rather a good idea: Keynes taught us that fiscal policy should be counter-cyclical. A bit of leaning against the wind might be helpful but the trouble is that (a) if things really go bad, the Chancellor's spending plans may be unsustainable and (b) public spending can be wasted on projects that cannot be justified on economic grounds.

There is a real danger that the Government's latest spending plans will have to be cut back. They are based on the economy continuing to grow at trend rate, something over 2.25 per cent a year. If there is a global recession that is out of the window: we would be lucky to keep growing at all. Yes, I know everyone but the Treasury warned of a slowdown in 1998/9 and the Treasury was right and everyone else was wrong. But that was different. The dangers now are more substantial.

As to quality of spending, the UK has quite an enviable record. We have not wasted money on the scale of the Japanese, with their pork-barrel construction projects. The Treasury is determined to face up to criticism of its policy on the London Underground so that the mistakes of the Jubilee Line are not repeated. The only stupid big public investment project was the Dome and that will not be repeated.

But while there are certainly many much-needed infrastructure projects that could be given some taxpayer support (London's east-west Cross Rail for example) it would not be realistic to try to rely on these to pull the country though recession. So, fiscal policy can help a bit, but don't count on it.

The really important policies that might help insulate us are structural ones. We need to keep ourselves more attractive than our rivals as a place to work and invest. The Government recognises this, witness its efforts to try to stimulate entrepreneurship. But many such policies are slow-burn. You don't suddenly get hordes of people thinking; "There's going to be a recession coming up, hey, I'd better start a business!"

In any case, while the long-term structural policies over the past 20 years are benefiting us now, vis-à-vis Continental Europe, the gap is narrowing as EU countries adopt many of the same policies themselves.

There are, however, some things that can be done. The key one is not to stifle growth where it wants to take place: for example, easing planning restrictions and giving fast-track clearance to companies trying to bring in skilled workers. If you want job growth not just in west London but the whole Thames corridor, you allow Terminal Five at Heathrow to go ahead. To say that is not to urge that environmental concerns should be set aside; just that if we stop growth here, it will help Paris and Frankfurt.

Getting through a world recession is not going to be easy. This is going to be a long haul: my guess is that real recovery is more likely to be in 2004 than 2003. But provided we are not stupid or arrogant this might just be the one the hits us less hard that the others. Bit of a change, eh?

Comments