Bill Jamieson: Plenty could derail our recovery

THERE are green shoots all right, but it is the shadow cast by geo-political events that pose a risk to their survival. By Bill Jamieson

Yes, I do believe I see green shoots. I believe the economy is past the worst of the recession. I expect a return to growth in the fourth quarter. And I predict that the recovery will strengthen next year.

Even to type these words brings a trembling to the hands and a nervous tic to the eye. Green shoots? Go and lie down in a darkened room until the cheap thrill of my Norman Lamont impersonation leaves my fevered frame. The only green shoots to be seen is the algae now spreading across the surface of that failed elixir of stimulus, Quantitative Easing.

Yet it is the threat just ahead to these green shoots, not their frail and tentative demeanour, that gives me the greater cause for apprehension. For the moment we can barely see the shoots for the charred and blackened detritus of the last boom. Here we are, wringing our hands over an economy where inflation has fallen, exports are up, the trade deficit has shrunk, manufacturing output has risen, business start-up inquiries are at a record, the stock market has rallied and, most striking of all, unemployment has been falling – month after month after month.

We see all this , or rather, we do see this, but we don’t believe it adds up to a hill of beans, any more than we did when Mr Lamont as chancellor claimed to have seen those green shoots in the recession winter of 1991.

Indeed, such was our scepticism back then that claims of their sighting were treated as a national joke. “What we are seeing,” he declared, “is the return of that vital ingredient – confidence. The green shoots of economic spring are appearing once again.”

Cue ribald laughter. Many thought he’d lost his marbles… or worse. Certainly evidence of recovery in late 1991 was scant and the signals from economists were ambiguous – as they so often are at such inflection points.

But Gavyn Davies, then chief UK economist at Goldman Sachs, subsequently wrote that the “green shoots” speech had turned out to be “remarkably prescient. From that moment onwards, output stopped declining, and, within a few months, it started to rise”.

Estimates of Gross Domestic Product (GDP) for that period show the trough of the recession occurring in the fourth quarter of 1991, with sustained growth resuming in the third quarter of 1992, when GDP grew 0.4 per cent compared to the second quarter.

Might it be that, 21 years later, we are in similar terrain? I do believe so. Estimates of the depth of the current recession as measured by GDP have already been revised down to show a smaller contraction than first announced. Nor is this likely to be the end of the revisions.

Many economists place greater reliance on the head count of numbers unemployed and the numbers in work than in the calculations of a statistical abstraction such as GDP.

And for all the talk of the latest figures being distorted by temporary hiring for the Olympics, the bigger picture is hard to deny – namely that the economy across the UK is still producing more jobs. Over the year to July, employment is up by 431,000. Arguably what is holding the economy back is the amount of capital – human as much as monetary – trapped in zombie companies that have little prospect of a full recovery.

Last week saw the Paris-based Organisation for Economic Co-operation and Development (OECD) point to “tentative signs” that UK growth was picking up.

The problem now – as it was back in 1991-92 – is that encouraging data one month is often contradicted by a relapse the next. Pinning the exact month when the economy turned the corner could take a year or more to calculate with certainty, particularly when allowances are made for revisions.

But figures on employment, the shrinking trade deficit, a 2.2 per cent rise in construction output in July and looking ahead, the uplift in incomes from falls in inflation are changing the picture. The Centre for Economics and Business Research calculates that poorer households should see a 1.5 per cent rise in their incomes next year.

And in the past week there has been a notable lifting of the gloom across Europe and the United States. Both the European Central Bank and the US Federal Reserve have now pledged to pursue further monetary expansion for that heroic but indefinable period “as long as it takes”. The latter is committed to buying in $40 billion of mortgage bonds a month until unemployment has not just fallen back, but that a broader recovery is firmly established – i.e., until well after those “green shoots” have not just sprouted, but developed into healthy plants.

This has sent stock markets sharply higher, causing consternation to those who over the past three years have come to sound like Private Frazer with their warnings of depression and hyper-inflation. As a result they have stayed on the sidelines, earning rock bottom returns on short-term deposit or safe government bonds with near-zero interest. Now they are in a tizzy about whether to stay aloof from the rally or plunge in.

Sentiment has changed. And I would say that this is the most encouraging sign of all, because it was the relentless stream of “crisis news” from the eurozone and the absence of a vigorous and sustained recovery in the US that has kept business across the Western world to hold back from new investment. Corporate UK is now sitting on a cash mountain.

What could knock back recovery is a further rally in the oil price. Weakness in the price earlier this year caused by expectations of a global slowdown has given way to growing fears of a military stand-off with Iran. The current spot price for a barrel of Brent crude is back up to $113. And it is the rising cost of oil for business and for motorists that could act as a recovery killer.

The concern is that Israel, increasingly apprehensive over Iran’s nuclear capability, will make a pre-emptive strike – possibly in the middle of a presidential election campaign which may make it harder for President Barack Obama to oppose Israeli action. How depressing (but how all too common) one set of worries begins to fade, only to be replaced by others we couldn’t see coming.

There are green shoots all right. But it is the shadow cast by geo-political developments in the coming months that pose a real risk to their survival.