Martin Flanagan: Government must rethink austerity measures

If sovereign bond yields drift south again in tandem, as with Spain and Italy yesterday, all the better for market sentiment.

We should not get carried away. The backdrop may temporarily appear more sanguine, and our fears may recede about the intransigence of the coalition government in refusing to dilute the UK austerity programme.

But we have been here before too many times. When the data swings back to being disappointing, as with the job creation figures from the US last Friday and Scotland’s “tentative and uncertain” economic performance in the first quarter unveiled today, doubts about the one-trick austerity pony reappear. As such, we are almost swinging from optimism to pessimism on a daily basis.

Without being against the UK debt-cutting programme per se, I’m with the camp that doubts you can just cut your way out of a deep economic downturn. That’s like coshing consumers to wake them up in order to spend.

A tunnel‑visioned fixation on meeting debt reduction targets, from the UK to Spain, Italy and Greece, doesn’t address the depressed economic facts on the ground to varying degrees in these countries.

It prompts concerns that history is repeating itself with a different twist. After the Wall Street crash of 1929, the US Federal Reserve let hundreds and hundreds of small banks fail. It helped trigger the Great Depression.

By contrast, politicians and central bankers flattered themselves that they had learnt that lesson by the financial crash of 2008-9. In the latter crisis, they pumped capital into banks to keep them afloat and liquidity into capital markets.

But it is legitimate to wonder whether today’s unmitigated austerity cheerleaders are unwittingly repeating the mistakes of the Great Depression: a draconian, doctrinaire blind spot of the authorities refusing to temper the medicine to the patient’s immediate needs.

The haul back to sovereign state good health in the West will be a long one anyway. I don’t think it would be that bad a strategy to extend the financial recuperation period by a couple of years or so through loosening European austerity targets to give a sporting chance to a current wayward economic recovery.

It is what the US has done. Barack Obama has set his face against the full-blown austerity route, and America is showing patently better growth than the UK and eurozone, arguably as a direct result.

Fine-tuning debt reduction measures this side of the Atlantic would not be a U-turn, or “wet”, to use a Thatcherite phrase from the 1980s. Rather, it could be a calculated calibration to bring a decent mid-term theory of sovereign debt reduction into sync with present-day economic pressures. Pragmatism should not be a dirty word.

Facing East helps to soften European blows

THE banking industry cut thousands of jobs in 2011 as the uncertainties of the sector crisis of a few years ago returned in a less dramatic form courtesy of eurozone uncertainty.

Top-end recruitment firm Michael Page gave evidence of this yesterday, saying that it sees no sign of a let-up in what is an effective freeze on job hiring in banking.

The company said that as a result its banking fees, a big contributor to group profits, fell 12 per cent in the first three months of 2012.

Of course, there will always be room for poaching stellar talent in banking. Rainmakers are insured against downturns. But Michael Page’s story is that at the middle and lower end of banking we may see retrenchment, or at best stagnation, in recruitment for some time yet.

Like many big-name recruitment firms – Hays is another one – Page is partly protected from this continued banking employment downturn by its geographic and sectoral diversity.

The downturn in financial services hiring is counter‑balanced by relatively strong recruitment markets in IT, engineering and mining, while the Chinese growth story is also a positive.

Page revealed that Asia, accounting for about 20 per cent of group earnings, saw gross profits rise 23 per cent in the first quarter. It is a handy backstop to have against European uncertainty.