Comment: Conundrum that strains best minds in the City

By MARTIN FLANAGAN
Published on 01/11/2012 00:00

MANY have remarked recently on the conundrum of how UK employment has been rising in the teeth of a prolonged economic downturn.

It has strained even the most counter-intuitive of City thinkers. And it is hardly explained away by theories such as companies perhaps making more use of short-term staff, retaining workers rather than investing, or there being more self-employed created as the double-dip recession descended.

The labour paradox has caused doubts about the validity of gross domestic product (GDP) data from the Office for National Statistics (ONS), which have tended to be more pessimistic than is borne out by the revised numbers.

Richard Jeffrey, chief investment officer and economist at Cazenove Capital Management, has done a study that shows in the past 20 years, covering 82 quarters of British GDP, only 16 times has the initial growth rate later been revised downwards. In other words, only very rarely are things worse than the estimates first bundled out.

By stunning contrast, 34 times out of the 82 quarters there have been upward revisions to growth of 1 per cent, a huge positive change.

It does nobody any favours for the ONS to gain a reputation as unreliable doomsayers. For example, it initially put negative economic growth in the three months to last June at 0.7 per cent, then revised that down to minus 0.5 per cent, then down to 0.4 per cent. Credibility is eroded.

As Jeffrey says, “if speed equals inaccuracy” as far as ONS data is concerned, and perhaps wrongly influences businesses to put investment on hold, those initial wayward estimates may be actively bad for any British recovery.

Irrespective of data turbulence, 
Cazenove adds a little cloud of its own by forecasting that even after this downturn is over there will be no return to Gordon Brown-style UK trend growth rates of 2.75 per cent.

Jeffrey says there has been such almost systemic economic change that we will probably only see 1.75 per cent in future. He argues that will lead to shorter economic cycles and greater vulnerability to shocks, as relative changes to that lower, more realistic, figure will have a quicker and deeper impact. Volatility and reduced economic expectations will become the new normal.

Heseltine’s call will not prove popular in No 10

WHICH part of the abolition of England’s regional development agencies this year did Lord Heseltine not “get”?

Despite that clear political signal of intent away from regionalism, a cornerstone of the peer’s report on growth is to urge the transfer of £49 billion of central UK government funds to regional or local bodies.

It ain’t going to happen. U-turns have become toxic to the coalition. More relevantly, Heseltine has called for a decision on airport building in the south-east of England by the end of 2013 rather than kicking the can down the road.