Alf Young: Recovery that’s been spirited away

ALL over the developed western world, it seems, the growth fairy has been posted missing. Germany, Europe’s powerhouse economy, is still growing at a to-die-for 2.9 per cent this year. But on Thursday Angela Merkel’s government slashed its growth forecast for next year to just 1 per cent. Meanwhile the Bank of England has revealed, in its latest monetary policy committee minutes, it now expects UK growth in what’s left of 2011 to be “close to zero”.

Again this week, we were told growth in the Scottish economy scraped a close-to-zero 0.1 per cent rise in output between April and June. That matched the UK’s performance as whole in the same quarter. But on an annualised basis the UK is ahead, growing by 1.5 per cent, compared to Scotland’s 1.1 per cent.

In Inverness, where the SNP is in conference, celebrating its remarkable Holyrood majority, the growth fairy’s absence should be causing mounting concern. Apart from the party’s ultimate aim of winning Scotland’s independence, increasing the nation’s sustainable growth rate remains the policy be-all-and-end-all it was throughout the party’s 2007-11 minority administration.

But the growth fairy, guardian of that ambition, has stopped sprinkling her stardust. Instead she’s left a much more corrosive legacy. Trawl through the small print of this week’s press release on Scottish GDP and you will find a host of sizeable revisions, almost all in a downwards direction, stretching way back to 2008 and earlier. Government statisticians are knocking substantial chunks off what they thought Scotland’s growth performance looked like as recently as July. The number crunchers have done something similar to UK growth figures too.

Finance Secretary John Swinney has resorted, yet again, to selective emphasis and inflating the significance of minute statistical variations – to try and convince us all that policy in Edinburgh is making a real difference to this daunting story. If only the coalition in Westminster would adopt a Plan MacB, he suggests, that remedy might triumph. But away from the economic kailyard the bigger picture is both simple and stark.

All across Europe and across the Atlantic too, three years on from the collapse of Lehman Brothers and the deep recession it triggered, western economies are struggling to rediscover the wellsprings of growth. As round after round of forecast downgrades is demonstrating, most of the wells drilled so far have turned out to be dry.

The route back to growth for deficit nations like the United States and UK was supposed to be curbs on personal consumption and soaring household and government borrowing, replaced by a rise in exports and private investment. If that was to happen, surplus nations like China, India and Germany would have to stimulate their own domestic demand and satisfy more of it by buying goods and services from us.

“Our fate,” as Bank of England governor Mervyn King put it in a gloomy speech in Liverpool this week, “rests to a considerable extent on the policies pursued by our trading partners.” In a globalised world that great rebalancing requires genuine movement on both sides of the scales. So far they have barely moved at all or, where they have, have gone in the wrong direction. China today, King pointed out, has “substantially larger” foreign exchange reserves than it had when this crisis first emerged in 2007.

That rebalancing, if it happens at all, will take many years. But, in the here and now, living standards are being sorely squeezed and jobs, particularly work opportunities for the young, are being lost in growing numbers.

In country after country, policy-makers face what King calls an “almost intractable challenge”. On the one hand, to chart that long collective journey to a new global economic equilibrium. On the other, to find credible ways of supporting, in the short term, sagging demand within their our domestic economies.

The tensions and frustrations are showing. At the heart of the eurozone, surplus Germany and deficit France are struggling to find any agreement on how to control the risk of sovereign defaults on their southern flanks or how to recapitalise banks across the wider European Union so they can withstand the collateral damage that’s certain if such defaults crystallise.

If they can’t agree within the next few days, what chance the other 15 members of the zone could agree a deal and force the two dominant partners to swallow it? On an even bigger canvas, what chance meaningful consensus at the next summit of the G20 group of leading industrial nations in Cannes in two week’s time? As growth prospects recede and the rhetoric grows ever more apocalyptic – “Time is running out” warned King on Tuesday – old enmities are emerging reinvigorated.

Emboldened by the crisis in the eurozone, the Eurosceptic right in the Tory Party is putting David Cameron under increasing pressure. They want what a 100,000-signature petition to parliament wants – a fresh referendum on Britain’s membership of the European Union. The same tensions, on a smaller scale, are appearing on Labour’s Westminster benches.

Who can tell where all this will end? Breathless newscasters and headline writers have been highlighting the chances of a double-dip recession. But if the eurozone crisis leads to disarray and the G20 cannot demonstrate effective leadership at Cannes the bigger risk, by some distance, is that we in the deficit nations of the west will find ourselves not in a double-dip but in long years of economic stagnation.

Right now we have growth that is anaemic at best, sky-high inflation, a rapidly weakening jobs market and families struggling to make ends meet. We have yet to feel the full impact of benefits changes and cuts to public services. Markets confidence is in tatters and returns on savings shredded.

We have no way of knowing how long this might all last. A year ago they told us we would be back on the track to growth by now. If Germany is already discounting its growth prospects for 2012, we may soon be curbing ours. For Japan after its bubble burst, the Nineties and Noughties turned into what they now call the lost decades.

That may seem like a very long way from this weekend’s SNP celebrations in Inverness. But neither the UK as a whole, nor Scotland in particular can ignore the consequences of the turbulent winds now blowing through the global economy, felt most keenly here in the developed west.

If the growth fairy isn’t found and put back to work soon, these disruptive winds may not stop at shaking the eurozone to its foundations or disrupting the life-chances of millions. If they persist they could undermine that promised vote on Scotland’s constitutional future. Three or four years from now a persistently stagnant economy surrounded by similarly afflicted neighbours would not be the best of environments in which to decide between rival concepts of sovereignty.