NEVER give upbeat talks on the economy. And never give the same talk twice in the same city. I speak from experience.
Two years ago I was asked to speak to a group of business people in Glasgow on the economic outlook. The brief from this Glasgow audience was clear. “Don’t depress us with doom-and-gloom stuff. Give us hope. Here’s your talk title: Where Are the Aces To Be Found? Give practical examples!”
At the time – early 2010 – this was monumentally difficult. But I rose to the brief. Every pack of cards, I began, has four aces. And here were my aces for hope...
It went down well, or at least no-one threw any furniture, which is good going in Glasgow. Heartened by this, I gave the “four aces” talk several times over the following 18 months. However, as we went into a double dip recession, I had to ditch the first set of aces and come up with new ones. The cards grew ever more flimsy.
Early this year I was asked to speak at short notice in Glasgow, to a different audience. Ah, easy-peasy! Dig out the notes for the Four Aces! “There are four aces in every pack”, I began, “and here my four aces for hope…”
Several minutes into the talk, there was an ominous eruption from the back of the hall, accompanied by a groan: “Not again!” followed by a low hissing sound: “Pish!”
I wrapped up, as they say, fairly quickly, and since then my notes on “Where Are The Aces To Be Found?” have been consigned to the very dark recesses of a bottom drawer.
2012 has been no year at all for aces. The government has missed its deficit reduction forecast. It has missed its net debt reduction forecast. Net debt continues to rise and is set to peak at 79 per cent of GDP.
Growth over the year is set to show a contraction of 0.1 per cent of GDP. This compares with consensus forecast back in January of 0.4 per cent. It is the fourth undershoot in the past five years and well short of that forecast from the Office for Budget Responsibility of 0.8 per cent.
Net trade has been far weaker than expected. Instead of export-led growth, net trade deducted 0.6 per cent from growth, the biggest shortfall in the contribution to growth from net trade since the Treasury survey began in 1997. The OBR now reckons that the current account deficit rose from 1.9 per cent of GDP (£29 billion) in 2011 to 4 per cent of GDP (about £62 billion) this year. Inflation, measured by the Consumer Price Index, has again overshot the start-of-year consensus – the eighth consecutive year it has done so.
So much for those aces. They turned out to be jokers – and with no laughs for these ones.
Just to add to the despair, recent miserable survey data has suggested we are on course for “triple dip” recession early next year. And the credit rating agency Standard & Poor’s (S&P) has just downgraded the outlook on the UK’s triple A rating from stable to negative, joining Fitch & Co and Moody’s.
So all this has left me with no alternative. Readers who have stuck it out this far now keenly await a hopeful theme that will offer some break in the leaden clouds. So I am pleased to return to familiar terrain: “Ladies and gentlemen: Where Are The Aces To Be Found? Every pack has four aces…”
The first is that last week’s labour market figures – by no means wholly encouraging –did contain in the complex data, some encouraging spots. Chief among these were the fall in youth unemployment, the growth in full-time employment and a surprising resilience in private sector job creation. In fact, since September last year, the number of new private sector jobs created, after stripping out the effects of definitional changes, totalled 627,000, a figure that cannot but put a question mark by the GDP statistics for the period. I also expect we will see tomorrow a fresh Bank of Scotland Report On Jobs likely to show strong monthly increases in both permanent and temporary staff placements in November.
The second ace is the remarkable upturn in construction sector activity. The latest Office for National Statistics figures show output climbed 8.3 per cent month-on-month in October. This series is important because construction accounts for around 7 per cent of UK output, it is an activity driver for other sectors and the October figure sharply reduces the year-on-year drag on overall GDP. Indeed, construction’s poor performance could mean that construction made a positive contribution to growth in the fourth quarter.
Infrastructure output has led the way. Indeed, infrastructure output was up by 15.1 per cent month-on-month in October and was also up by 19.8 per cent in the three months to October compared to the three months to July.
For good measure, the ONS also recently reported that construction orders rose 5.4 per cent quarter-on-quarter in the third quarter, which further supports hope of a positive contribution to GDP from the sector. I don’t invent it. I only report it.
The big question going forward is whether the sector will see an upturn in 2013. Its formidable problems include reduced public investment and spending, an extended weak economy, a struggling housing sector, and problems in getting funding for large-scale projects.
But says Investec economist Philip Shaw: “We judge that the construction figures should begin to add positive momentum to GDP rather than weigh heavily on output, as they have so far this year. In our view this makes a decline in GDP in Q4, and by implication a triple dip recession, much less likely… Unless we see a further marked deterioration elsewhere in the economy, a ‘triple dip’ recession looks to be off the cards.”
Further support for the view that a triple drip may be avoided has come from a significantly improved December CBI industrial trends survey. This offers hope that manufacturing output will be positive in the first quarter of next year and help the economy grow anew.
The third ace is the continuing albeit modest improvement in mortgage lending and housing market activity in certain areas. That confidence may be starting to return is encouraging.
My final ace is a general and historic point – our capacity at the last minute to pull irons out the fire. We saw this in the 1920s, 1930s and 1970s when prognostications of terminal economic decline and social unrest were widespread. I do believe the economy has undergone a defining structural shift and, unlike previous recoveries, we will not, barring some game-changer, see a return to economic growth of 3 per cent and over for the foreseeable future. But the business cycle does what cycles do by definition: it turns – as this one will in the fullness of time.