A global recession could be on its way - and George Osborne's comments aren't exactly reassuring

 Since the 1980s, public investment has been lower than in the US, France, Canada and Switzerland. We can see with our own eyes that we are behind the curve in electricity generation, road transport and London airport capacity

Andreas Whittam Smith
Wednesday 02 March 2016 18:25 GMT
'Some of Osborne's comments in Shanghai left me uneasy'
'Some of Osborne's comments in Shanghai left me uneasy' (Getty Images)

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Louise Thomas

Louise Thomas


There is an often repeated joke in the City, attributed to the Nobel-prize-winning economist Paul Samuelson, that the stock market has predicted “nine out of the last five recessions”. I bear this in mind as I start to describe what I see ahead: the world economy is slowing down in a manner that seems unlikely to be corrected quickly. We may be heading into a global recession.

In fact, there will be economic growth this year. But the OECD, an organisation that monitors global trends on behalf of its 34 member countries, observes that this “is likely to expand no faster... than in 2015, its slowest pace in five years”. And it adds: “Trade and investment are weak. Sluggish demand is leading to low inflation and inadequate wage and employment growth.”

While there was some cheer to be had from the US last week – the economy grew slightly faster in the fourth quarter than economists had expected – a few days later came the report from China that economic activity in January had fallen to its lowest level since February 2009. To add to the misery, on Tuesday the US credit rating agency Moody’s revised its outlook on China from stable to negative. In addition to noting the country’s rising debt and falling reserves, Moody’s attributed its move to “uncertainty about the authorities’ capacity to implement reforms”.

With this mixed news in mind, let us turn to the G20 group of advanced nations, which held a meeting in Shanghai at the end of last month. Its conclusion? “Downside risks and vulnerabilities have risen, against the backdrop of volatile capital flows, a large drop of commodity prices, escalated geopolitical tensions, the shock of a potential UK exit from the European Union and a large and increasing number of refugees in some regions.” That is a very long list of negative factors.

It was, however, the G20’s next observation, full of foreboding, that was most significant: “Additionally, there are growing concerns about the risk of further downward revision in global economic prospects.” Note that George Osborne, Chancellor of the Exchequer, was at this meeting. He signed the gloomy statement.

The most important reason for pessimism, however, is not mentioned in the statements by official bodies. Nor could it be, for it raises the issue of whether these organisations and their governments have the ability any longer to influence the course of events.

Once upon a time, for instance, governments would reduce interest rates to stimulate economic activity. But now that interest rates hover around zero, that remedy is unavailable. And it’s hard to believe that negative interest rates can provide the necessary boost. Or governments would let the supply of money expand. But doing that on a grand scale recently, through the so-called “quantitative easing”, has had more impact on the prices of assets, especially real estate, than it has had on business activity.

In short, the near impotence of governments is a profound reason for fearing that the advanced countries that sit round the G20 table might inadvertently drift into a worldwide recession.

In Shanghai, Osborne gave an interview to the BBC in which he began by acknowledging that the clouds were darkening. “We’ve just had figures that show the economy is smaller than we thought in Britain, and we also know that global risks are growing and Britain is not immune to those things.”

I shall return to this interview, but meanwhile I interpose the latest news from the UK manufacturing sector. Activity has dropped to a 34-month low according to a survey of purchasing managers. An official working on the survey commented, “The near-stagnation of manufacturing highlights the ongoing fragility of the economic recovery at the start of the year... the breadth of the slowdown is especially worrisome. The domestic market is showing signs of weakening while export business continued to fall.”

In his interview, the Chancellor went on to draw the opposite conclusion from what might have been expected. “We may need to undertake further reductions in spending because this country can only afford what it can afford and we will address that in the Budget,” he said. That phrase – “this country can only afford what it can afford” – is strangely reminiscent of what finance ministers were saying in the early 1930s when the Great Depression began to take hold. But that would be such an absurd posture to take in today’s circumstances that I must wait for Osborne’s budget statement to see whether I have misinterpreted him.

More than that, I shall pay particular attention to his plans for spending on Britain’s infrastructure. It is the only valid method of stimulating economic activity that remains available and, as a country, we have been spending less than other advanced economies. Since the 1980s, for example, public investment has been lower than in the US, France, Canada and Switzerland. We can see with our own eyes that we are behind the curve in electricity generation, road transport and London airport capacity.

Here, Osborne has seen the light, for last October he committed £100bn of spending in this Parliament for new roads, rail and flood defences. At the same time, he launched a National Infrastructure Commission, to be headed by Labour’s Lord Adonis, and asked it to report on three initial projects – northern transport connectivity, especially east-west across the Pennines; large-scale investment in London’s transport infrastructure, including Crossrail 2; and ensuring that investment in energy infrastructure can meet future demand efficiently.

All this is to the good, but government ministers are notoriously poor at turning soundbites into durable programmes. Did the Chancellor really mean what he said about increased expenditure on infrastructure? If the answer is yes, then I shall breathe a modified sigh of relief.

It wouldn’t on its own ward off a world recession, but it would be the right thing to do in the circumstances.

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