Red light spells danger: David Cameron’s warning about the world economy is politically motivated but that doesn’t mean he’s wrong


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Some years ago, David Cameron gave his party some solid advice: stop banging on about Europe.

This week he is trying to achieve the same end more obliquely. Issuing his warning about the “red lights all over the dashboard” of the world economy, he wants to focus public attention on the Tories’ best card, the economy. Mr Cameron also, a little too blatantly, wants to distract attention from Ukip’s near-certain ousting of the Tories in Rochester and Strood on Thursday night.

So it’s about politics. But that does not make it bad economics. Yesterday Japan, still ranking third in the world, made the unexpected  announcement that it was in recession – again. This, after all, is a country that has barely registered growth in the past two decades. So-called Abenomics, named after Prime Minister Shinzo Abe’s plan for stimulus and reform, has run into the sands. Closer to home, the eurozone is sliding into recession for a third time. We need a new vocabulary to cope with such events; a recession is supposed to be a brief interlude between longer episodes of healthy growth. In the case of much of the EU, it is a matter of  short, anaemic bursts of growth interrupting stagnation and decline. Italy, France and Germany are barely able to register a euro’s worth of growth between them.

This leaves the Brics – once the great hopes. Now only India is showing much sign of progress. China has stumbled, as she surely would in the face of such massive distortions in her economy, especially in the banks and property. Russia’s position speaks for itself; tough sanctions are hurting, but the underlying weakness of a gangsterish economy far too dependent on natural resources is long standing. Which leaves the Anglo-Saxons in the strange position of looking at the rest of the world in the rear-view mirror, speeding along at a 3 per cent or so expansion in national income, and something of a jobs boom – though of course threatened by trends in the wider world. Hence Mr Cameron’s fretting about the frail condition of our trading partners.

So we should be grateful for the comparatively robust state of the US and British economies. It is no accident that the Federal Reserve and the Bank of England were the two central banks that increased their balance sheets the most, proportionately, during the slump – in other words, the ones that bought government debt the most indiscriminately and the most determined to send a cash boost through the system. Ours are also the major economies that are, very broadly speaking, the most liberalised among the G20, and so best able to withstand a downturn. As a child of Thatcherism, Mr Cameron could make more of that.

All of which sounds a little smug; but there is much to concern us in Britain. The trade deficit indicates uncompetitiveness, as does poor productivity, and we are hopeless at promoting economically efficient social mobility and educational opportunity. The Government’s own deficit – supposedly the centrepiece of the Coalition’s “long-term economic plan” – is worse than last year.

Even so, the UK, expecting inflation numbers this morning, and the US do not look imminently exposed to the toxic danger that overwhelmed the Japanese and which is dragging the eurozone down now like quicksand:  deflation. There is a chronic and self-fulfilling lack of confidence in the European economies on the part of consumers and business people alike about spending and investing. It is just as pernicious as the inflationary spirals of the 1970s that still haunt policymakers. Mr Cameron did not mention that explicitly yesterday, but it is the biggest red light of all.