Hamish McRae: This winter won't be fun, but 2011 could be a belter...happy holidays!

Economic view

Sunday 23 October 2011 04:04

So can we go off on holiday with a spring in our step, secure in the knowledge that when we come back there will still be a growing economy to greet us?

Of course the immediate answer is yes, in the sense that the present period of reasonable growth is not going to reverse in a couple of weeks. But behind the question is a more serious set of concerns, about inflation, the way the economy will react to spending cuts, the dangers of a global double-dip and so on. The corner has been turned but there is a certain apprehension in the air and that should be taken seriously.

So what do we know and what should we expect? I find the monthly report from the National Institute of Economic and Social Research on what is happening to growth and how this cycle compares with past ones a comforting place to start. The right-hand graph shows its latest estimates, which came out on Friday. As you can see, we have been clambering our way back up with decent growth for the past six months and are now pretty much on the same path as the 1980s recovery. What we have experienced is not as bad as the 1930s (though initially we went down as fast) but worse than the 1970s and the 1990s. But – there has to be a but, doesn't there? – the National Institute does caution that it expects growth to soften over the coming months as the fiscal consolidation takes hold.

This expectation that the British economy will slow later this year and early next is echoed by things happening elsewhere in the world. Start in Europe. There is the general weakness across the Mediterranean as countries there tighten policy. The two biggest members of the Club Med, Italy and Spain, both showed some growth in the second quarter and that is fine. But that was before consolidation set in and Spain at least may well slip back into recession in the months ahead. More important, though, is the position of Germany. To generalise, its companies are hugely confident but its people are extremely cautious: exports are great but consumption is stagnant. Unless and until German consumption picks up, it is hard to see much growth in the eurozone as a whole.

So Europe will not sizzle and may falter. The US? Difficult. We have just had some disappointing employment figures and though there has been reasonable growth, there is a deep concern that this growth is artificial in that it has come from government stimulus rather than underlying demand. Unemployment is steady at 9.5 per cent, which is dreadful. Given the growth that has genuinely been taking place, US firms ought to be hiring and they are not, or at least the 100,000 or so new private-sector jobs being created each month are not enough to get the unemployment rate down, given the natural growth in the workforce.

The consensus view is that the US will have a period of much slower growth but will not slip back into actual recession. But it is tight.

The other economy that matters most in terms of world demand is China. I have had several conversations in the past few days about China and the conclusion from all of these is that things are slowing down quite sharply as credit is tightened, the consumer boom slows and the government's huge investment in infrastructure is throttled back. But it is hard from a distance to make a judgement as to whether this is just a much needed easing of growth or whether something bigger is happening. So I took a look at various forecasts, including those of Goldman Sachs, which believes that China will stick at its 10 per cent growth rate through next year.

The Goldman numbers do, however, deserve a wider audience and I have put a summary of them in the left-hand chart. The great distinction is between the developed world, which is still struggling back to some sort of growth, and the big emerging economies, which are racing on. But within the advanced economies there are some interesting quirks. As you can see, the economic team at Goldman believes that the UK will be one of the slowest-growing economies this year, slower even than the eurozone, but next year it will be one of the fastest in the developed world. Japan's economy deteriorates more swiftly than any other; ours improves more than any other.

This is really interesting, and indeed encouraging, but is it credible? I have great respect for the economics work that comes out of Goldman but it is asking a lot for the UK economy to grow at more than 3 per cent a year. If it were to happen it would imply no double-dip, or at least not one that you would notice. It would also lead to a faster improvement in public finances than the Treasury or the Office for Budget Responsibility have dared project, for faster growth generates more tax revenue and, other things being equal, lower welfare spending. There is still a giant mountain of debt to climb and that will take several years, but at 3 per cent plus growth we would be shinning up it pretty sharpish.

So this is an interesting idea – but is it right? My instinct is still that the back end of this year and the early part of next will be very difficult. We will learn the full impact of the spending cuts in October and even people who are troubled by the terrible waste of the previous government will be shocked to see how hard it will be to get spending back to something close to balance with tax revenues. It will not be a fun winter and there may well be a quarter when the economy falls back. Technically, that would not count as recession, more a pause, but it would validate the idea of a double dip. If you look again at that graph on the right, you can see that recoveries often have bumps before they are fully established.

In that regard, the current sense of unease is quite justified. As we move through 2011 we will, however, become less worried about growth and more worried about government revenues, for there are structural weaknesses in our tax system that will become more apparent. I'll write again about that after the holidays. Meanwhile, let's just focus on the way the UK has clawed its way back to some sort of financial respectability after the change in government.

Think back to sterling in the spring. In March it was trading at $1.50. In mid-May, when it was not clear what sort of government we might have, it was down to $1.44. But on Friday it was back up to $1.59. There has been some dollar weakness too in the past few weeks, and there was a sharp fall in the euro in the spring when the Greek crisis erupted.

So all currencies do move about. But the general point, that the world does now think that we will be able to cope with our problems, surely stands. And that is worth hanging on to, even if we are right to be apprehensive about the autumn ahead.

Boards need true judgement and that's not gender specific

There was an interesting and potentially important initiative last week from the Government to try to boost the number of women in the boardroom. It has appointed Lord Davies (Mervyn Davies, former chairman of Standard Chartered and a Labour minister) to report on how to remove obstacles to women making it to the board, with the aspiration that at least half the new appointments to public body boards will be women.

It is interesting this should be a coalition focus and not just because of Lord Davies – though some might say it is another example of "better to get them inside the tent". This must, as a general proposition, be a good idea. The greater the variety of skills and background on a board, the more likely it will pick up problems before they occur, nudge management to look at opportunities it might miss, and handle staff more wisely. But there are at least two serious difficulties.

One is that the technical knowledge needed to be a non-executive director of a major company has become much wider than it was even a decade ago and most of the people who have acquired that knowledge through the previous 30 or whatever years of their career happen to be men. Finding women with that range is not easy, as the head-hunters would acknowledge.

The other is that finding women executive directors is even harder. The non-exec pool can be supplemented with women from the professions and the civil service, but the executive pool is comprised solely of good managers. There are a few wonderful women senior executives, but not many.

I have a further worry. Think back to the corporate disasters of recent years, RBS and HBOS for example, or even BP, and ask whether they might have been averted had there been more women on the board. I think the answer is probably not. Ultimately, what matters is better governance at every level, and a better balance in the boardroom will have a part in that. But what is really needed is true independence and judgement, rare qualities indeed.

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