Sean O'Grady: Only a fool would call this a recovery

Economic Studies

It is a bad habit of economic journalism to focus hard on whether a given figure is marginally positive or marginally negative. Closely allied to this is an obsession, understandable enough in its own way, with whether a period of economic progress, or lack of it, equates to "recession" – the common usage of this term means two successive quarters of negative growth. Thus, two quarters of minus 0.1 per cent growth is a modest contraction, but preceded and succeeded by quarters of steady growth of, say, 0.1 per cent, would be portrayed as a recession followed by a recovery, when it is nothing of the sort really; the difference from one quarter to the next would be impossible to discern. Stagnation can be worse than a short, sharp recession followed by an equally robust bounce back in growth, if the stagnation – minimal growth – drags on for years , even decades, it is far worse, as the Japanese have found.

Which brings us nicely to the eurozone, now seemingly joining the US and Britain in the great growth slowdown. In the good times, the average interested citizen could go for years without taking much notice of quarterly growth figures in the eurozone. The latest ones, though, merit close attention, even alarm. France did not grow at all; the supposedly healthy areas of Germany and the Netherlands both grew by 0.1 per cent. Italy and Spain "outperformed" by these dismal standards – 0.3 per cent and 0.2 per cent respectively. Altogether, the eurozone grew by only 0.2 per cent. In context, that is an annualised rate of 0.8 per cent. A healthy, mature economy might be expected to follow the general trend of rises in productivity through technical innovation and other changes, of say 2.5 per cent a year. In a "bounce back" recovery of the kind usually observed in the 60 years after the Second World War, growth would often increase by 3 or 4 per cent, on an annual basis. This "recovery" is so faltering that perhaps it should be called a "fools' recovery"; far too many of us assumed that the economy would return to normality relatively fast. No such luck.

One reason is that Europe, as with the world, is emerging from a financial crisis and historically, they are much slower to overcome. Recoveries are usually held back by continuing weakness in the banking system and shortage of credit, as now. The other "headwinds" are also apparent – high commodity prices, partly inflated by the much stronger recovery in China and east Asia, are choking off growth, and consumer and business sentiment is very fragile – witness the collapse in shares over the past fortnight, and, tellingly in bank shares.

Having spent trillions in supporting their economies in 2008-09, governments have little scope to do much to stimulate them now. There is not much that can be done about that; when the money finally runs out, it runs out. What politicians can do, is to put on a slightly more impressive show of running their economies.

No number of EU or Franco-German summits seems able to overcome the basic structural problems of the eurozone. It has been clear for many months now that the solution proposed by Giulio Tremonti and Jean-Claude Juncker, the Finance Minister of Italy and the Prime Minister of Luxembourg respectively, before last Christmas – pooling eurozone national debts in one great big eurobond market – is the only realistic solution to the problem.

Successive bailouts – funded by the issue of extra German-guaranteed debt – will de facto end them up in the same place anyway. Germany is, rescue-by-rescue, adopting the debts of the weaker brethren, but in a messy, disorderly way, with none of the potential advantages of eurozone bonds – bonds that one would hope would be supported by a tighter EU control over governments' borrowing plans.

National parliaments would not, note, necessarily have to surrender control over taxes and spending priorities; but the big number on annual borrowing could not be allowed to float off anywhere in the context of a single bond regime. The problems are manifold and the risks huge; but, as someone said, we can't go on like this.

Inflation gloom will eventually lift

The latest inflation figures offer little solace and they will get worse over the autumn, as rises of around a fifth in gas and electricity prices feed through to consumers. Rail fares will rise sharply on the basis of the July numbers (but not as sharply as they would have done if the fare rises were linked to, say, September's numbers). But the good news is that inflation could subside quite dramatically next year. The hike in VAT will drop out of the figures for the annul rise, and commodity prices are down quite a bit on their peaks this year – the sub-$100 barrel of oil should soon be back.

More crucial, the state of demand in the economy – by which I mean demand for goods where people pay for them rather than loot them – is feeble, and so is investment. So the scope for shops and businesses to push up prices may be even weaker than we now assume. History provides interesting examples, often after a rise and fall in commodity prices, sometimes coupled with changes in sales taxes. Thus from 1956 to 1957 (after the Suez Crisis and oil shock), annual inflation fell from 5.2 per cent to 1.8 per cent; from 1982 to 1983, it dropped from 8 per cent to 3.7 per cent; in 1990 to 1991, from 10.9 per cent to 6.4 per cent, and in 2008 to 2009, from 5 per cent to minus 1.5 per cent. All these episodes lasted six months or so. The prospect of a similar halving in inflation by next spring – allowing wage rises to again match price rises – is one of the few things in economics to look forward to in the coming months.

s.o'grady@independent.co.uk