Peter Bickley: No wonder recovery is failing as we start to fear the worst!

Published on 14/07/2012 13:53

It IS starting to feel as though a dietary adventure is looming. I may have to eat my hat, a shame since said hat is as near as I get to a credit
default swap (CDS) – it hedges me against sunburn and rust,
according to the elements. Doubtless it also tastes disgusting, as unpleasant as discovering that the counterparty to your CDS is a Greek Bank.

Recently I have argued that there was something fishy about the UK’s GDP numbers and the alleged plunge back into recession. This uber-gloom did not seem to sit well with the usually more reliable data from the front line. My case was logical and possibly still correct; it is getting harder, though, to avoid the sense that something is amiss.

All around there is the clatter of wheels falling off. In the US the recovery suddenly looks wobbly. The eurozone flounders ever deeper in the mire. Even the emerging world is in a bit of a soft patch. And now the data is starting to signal a problem in the UK, too. Across a broad swathe of indicators there is a nasty southerly drift.

It is legitimate, if uncomfortable, to ask whether my earlier thinking was just wrong, suggesting that it really was as bad as all that or whether something has changed. If it is the latter then it has to be something pretty important and something that does its damage pretty fast. On the face of it, sustaining the argument that it really wasn’t as bad as all that and that something actually has changed is tricky. Yet that is what I think is correct.

All around us is uncertainty. Do Europe’s politicians have a clue? Will the euro blow apart? Will the US hit a wall of fiscal contraction come the year-end? What damage may political succession in China do? Is the UK in deepening recession or not? Will it ever stop raining?

Not a lot of this is new. Eur­ope has lurched from crisis to crisis for ages; the US has been ungovernable for months; every­one knows China’s growth rate is slowing. If we are all
rational people then we should have learnt to live with all of this a long time ago; surely the time to panic – and the time to hunker down – was when all this stuff was becoming apparent?

But life isn’t that tidy, not least because we have a touching faith that somehow it will be alright on the night. It’s only when it dawns on you that it really could all go horribly wrong that you start to get properly worried.

I think that’s what is happening. America’s fiscal contraction – potentially 5 per cent of GDP, enough to plunge the economy into deep recession – is mandated if politicians cannot agree something more sensible. We rational people might have ass­umed they would see sense but deadlines are rushing towards us and sense seems to be an 
unknown concept.

So households and businesses start to fear the worst; no wonder the recovery is fading. In Europe successive crises get bigger; the risks of collapse seem to grow with each utterance to the contrary. Most of the eurozone is in recession – and still digging. Being stupid enough to have the eurozone as our biggest export market this impacts us too; no wonder confidence is slumping and the economic indicators have swung negative.

So what has changed is not so much the advent of new and unexpected developments which alter the economic landscape. It’s the perception that’s shifted, a realisation that things may be out of control. Even Sir Mervyn King, governor of the Bank of England, has been prepared to admit surprise at how rapidly this change has happened. Just two months ago a further tranche of quantitative easing had seemed unlikely, but we got it last week.

This brings good and bad news. The good news is that with a bit of nous these things can be fixed. The bad news is the absence of nous; and as we collectively hunker down our economies cannot grow. Meanwhile, the hat jury is still out – but I don’t like the look on their faces…

l Peter Bickley is a consultant economist