Bill Jamieson: No ignoring signs of global growth
IS IT? Can it be? Dare we hope? Less than a week ahead of Chancellor George Osborne’s austerity budget Mark III and the mood across international markets has improved appreciably.
Might it be that an uplift in the world economy and our major export markets could lift our own meagre growth prospects?
A central feature of the budget presentation on Wednesday will be the forecasts for economic growth from the independent Office of Budget Responsibility.
Few have been expecting much of a lift to the current forecasts (they were reduced in November) predicting growth of just 0.7 per cent. Indeed, some commentators suspect the forecasts for subsequent years – 2.1 per cent in 2013 and 2.7 per cent in 2014 – are too optimistic and may have to be scaled back.
But latest indications worldwide would suggest that a fractional increase in the 2012 forecast might now be on the cards. It barely lets Osborne off the austerity hook. But it could enable him to be slightly more encouraging on prospects than would otherwise have been the case.
In America, Japan and Germany there were further signs last week of an improvement in business conditions and sentiment.
This matters critically for the UK government, served a warning from rating agency Fitch early last week that it had put the UK’s coveted triple A credit rating on negative watch.
Osborne needs every ounce of growth in export markets to help push up our own dismal growth outlook and meet those fiscal deficit reduction targets.
Failure to do so – or any sign that he was buckling under political pressure to loosen the tight fiscal policy stance – could see that rating whipped away.
The scale of the challenge is daunting. For Osborne to meet his deficit reduction plans the UK economy needs to grow by 2.5 per cent in each of the three years ahead. An improvement of such a magnitude for 2012 and 2013 would be little short of miraculous.
Last week saw the US S&P 500 Index break above the 11,400 level for the first time since June 2008 – a level unimaginable just a few months ago. The surge was fired by encouraging news on the labour market and manufacturing activity. Surveys from both the New York and Philadelphia Federal Reserves showed continued growth in manufacturing this month, while initial jobless claims fell again the previous week.
Friday brought news that US factory production rose 0.3 per cent last month – the third monthly increase in a row. The factory data follows on a series of encouraging signals for the US economy. Last month it created a better than expected 227,000 jobs, of which 31,000 were in the manufacturing sector.
More people off the dole and into work means more spending in the shops, strengthening demand for consumer goods and services, leading to further labour hiring. This could be the start of a benign cycle of recovery after three years of misery. Even the US housing market, the source of the sub-prime debacle, is starting to show signs of stabilisation. The stock of unsold homes is coming down and the pace of price falls is easing back.
In Japan the Nikkei rose for three successive days on improving signs for the country’s manufacturing sector. Here the index is back well over 10,000, a level few dared to predict last year.
And in continental Europe, the FTSE Eurofirst 300 index has extended a stonking advance. Shares in German companies once again outperformed the wider European market, helped by a positive batch of domestic company earnings.
Last week brought news that the ZEW German economic sentiment index surged to 22.3 in March from just 5.4 in February, the highest level since June 2010, taking the recovery on this index to 76 points over the past three months. This, points out Thomas Harjes, European economy analyst at Barclays Capital, is the steepest rise ever recorded in the history of this index going back to 1992. After deep bouts of Teutonic anxiety for most of last year about the Euro- zone debt crisis, financial market experts are increasingly upbeat about the German economy and its prospects.
Since December the DAX index has outperformed the S&P 500, FTSE 100 and broader European indices by a wide margin.
“The latest figures”, says Harjes, “add further evidence to our view that following a soft patch in Q4 2011 and only marginally positive growth in 2012 Q1, German GDP growth will accelerate in the course of the year if” – here comes the obligatory rider on all things Euro – “the Euro area sovereign debt crisis remains contained.”
All this has helped lift financial market sentiment in the UK, with the FTSE 100 Index last week hitting an eight-month high.
Reassuring though all this may be to Osborne, it would be no surprise if the Labour shadow Cabinet was not already working this weekend on the Budget speech rejoinder from the Opposition bench. How is it, Ed Miliband could forcefully counter, that so many of the Group of Seven major economies are showing discernible signs of an upturn while miserable Osborne austerity Britain is trailing way behind, with the economy barely registering a pulse?
The problem, of course, is more complex than such a soundbite. America can draw on a far more ingrained enterprise culture and easier regulation surrounding hiring and firing, while Germany’s economy has long been export-led and less dependent on the domestic consumer sector. In the UK, the service sector accounts for some two-thirds of GDP and is chronically dependent on household spending and domestic consumer demand. This has been severely hit by the pressure on real, after- inflation, household incomes and a flat (at best) performance in house prices where they have not continued to fall.
Remember also that stock markets are fickle and are prone to run ahead of events – as much on the way up as on the way down.
There is another problem. Few currently dare to greet these signs of improvement as a genuine and sustained upturn, bearing in mind what happened last year when an apparent recovery ran out of momentum. Huge risks still overhang the economies of Europe and America. Growth has slowed in many emerging economies, from China to Brazil, so the world economy overall is still likely to show slower growth this year.
A strengthening oil price has also put a question mark over the robustness of recovery. And most will want to see a sustained improvement over the second quarter before being confident that the economy has really turned up here – as opposed to bumping along the bottom.
While private sector hiring intentions are continuing to improve – and expect to hear further encouraging news on this front from a fresh Bank of Scotland/Markit survey tomorrow – a solid, sustained recovery is by no means yet in evidence. So the Chancellor cannot count on a forceful growth rescue any time soon. As a result, his budgetary hands are tied. And as Simon Wells, chief UK economist at HSBC points out, the UK is barely at the end of the beginning of the fiscal consolidation, let alone the beginning of the end. Indeed, on some estimates, by the end of 2011-12 more than 70 per cent of the planned tax rises should have been implemented – but just over 10 per cent of the total planned spending cuts.
Any move to raise the starting level of income tax towards £10,000 will need to be financed by tax rises elsewhere. Otherwise those rating agencies could deliver a crushing thumbs down.
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