Neither a boom nor a blip, but a new world

Conflicting signs about the state of the economy are misleading. In fact, the very ground has shifted
Is it a boom, a blip? It rather matters for obvious political reasons, for it may affect the timing of the election, perhaps even the result. But it also matters for all our futures: if the British economy were heading into another late Eighties-style boom, things might be fun for a while but there would be a reckoning around the corner. If, on the other hand, it were only managing to achieve the present moderate growth by soon-to-be-reversed cuts in interest rates, there would not be much of a party during the next year, even though the hangover might be less virulent.

Yes, yes, I know economists are bound to disagree but the problem here is not so much with economists but with the figures. On this occasion it is the figures that disagree.

On the one hand there has in recent weeks been a mass of evidence that some sort of consumer boom is a-building. House prices seem to be moving up at last; not just being talked up by estate agents. Just yesterday the building societies revealed that in May they approved pounds 4.2bn of new mortgages, more than at any time since the 1980s. Until this week retail sales also seemed to be strong, with encouraging data not just in the official figures but from groups like the John Lewis Partnership, which produces week-by-week sales figures. Consumer spending, a wider measure than retail sales, is certainly rising: it was up more than 3 per cent last year against a rise of 1.5 per cent on goods. Unemployment is coming down, even allowing for flaws in the way those figures are collected, and the number of notified vacancies is rising. Add in the boost to people's wealth from such things as the conversion by building societies to public limited company status, and most of the building blocks of a boom seem in place.

But against this there is another block of data which points to an economy that is struggling. May retail sales, published on Wednesday, showed a fall. Manufacturing is technically in recession, with output having fallen for two successive quarters, although it is still up a bit on the level of a year ago. If you look at employment, not unemployment, that too fell in the first quarter of this year.

So there is a puzzle here. The new OECD half-yearly forecast, published yesterday, expects the British economy to grow by 2.2 per cent this year, compared with France at 1 per cent and Germany at 0.5 per cent. It also expects 3 per cent growth next year. But these forecasts can be spectacularly wrong. In any case, pure figures do not explain why some aspects of the economy seem to be whizzing ahead and others are flat on their backs.

I think there is an explanation. There are three big structural shifts taking place in all developed economies that make the signals confusing. One is the near-elimination of inflation. We are used to the idea that we become richer by earning sufficiently more money to more than compensate for inflation. But we are now moving towards a world where, in many areas, higher living standards come from lower prices, not higher wages. Prices of virtually all electronic goods fall by the month. Transport costs are falling, for there are new cheap airfares to Scotland and the Netherlands, and cheaper rail fares to Paris and Brussels. Telephone charges are falling; so are household fuel bills. Even where charges are not falling, quality is improving: a Ford Fiesta now is better than a Ford Fiesta of 10 years ago. This sort of advance was familiar to our Victorian ancestors, but we are not used to it, so we fail to see that our real income is rising.

The second shift is from manufacturing to services, the shift from spending on physical goods to spending on intangibles such as information or entertainment. For example, in 1980 US consumers spent half as much on information as they spent on food; by 1992 it was three-quarters; now the two are probably almost equal. A similar pattern is surely happening here, but - and this is the important bit - different types of spending show up in different ways. We are spending a lot more on travel, self-evidently on the roads and in the air, but none of that shows in the shops. If we make more mobile phone calls, again, no benefit to the high street. So living standards rise, but the rise feels different to the rise we experienced in the 1980s.

Third, the rise in insecurity, real or perceived, means that we feel we have to spend more on some things even if we would prefer not to. Take job insecurity: the statistics may say that there has been no real change since the 1980s, but the fact that people feel more insecure will mean that they will seek to save more, maybe buy more insurance, or put more into a pension plan.

And there lies the answer. These three grand shifts make the economy feel different. What we are seeing now is neither a boom nor a blip. It is something altogether more boring. It is a solid expansion: quite secure, not much fun. Actually there is nothing wrong with that. Previous booms collapsed because they were bubbles puffed up by inflation. That world has gone, here and elsewhere.

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