Bill Jamieson: Bank sparks faint hope of recovery

When All Else Fails, Clutch At Straws. What a great clarion call this has become. For three and a half years this, in essence, has been the rallying cry of finance ministers and central bankers as we hunker down before the approaching avalanche of debt. And it was discernible again yesterday in the latest Inflation Report from the Bank of England (proposed lender of last resort, let’s not forget, to an independent Scotland).

Never mind the Bank’s previous buckled forecasts of inflation and shattered recovery hopes. Its latest fan charts on inflation and economic growth are once again in optimistic lockstep: a difficult “zig zag” year ahead, says the Governor, Sir Mervyn King, but with inflation falling to 2 per cent or just under by the end of the year. Meanwhile, as the magic elixir of quantitative easing kicks in (though not for those six million dependent on investment income for their retirement), the economy in 2013 and 2014 will be back to 3 per cent year-on-year growth or thereabouts.

Can we believe it? Dare we believe it? Strangely in the entire report, the two biggest constraints on that recovery – the words “de-leveraging” and “balance sheet” – are absent. These are damning omissions. Yet I believe the Bank to be right in this two to three-year assessment. I’ll deal later with the broader sweep of the debt mountain that threatens to bury us – or at least the world we knew before the onset of The Great Contraction. In a grim debt repayment era stretching many years ahead, our fate is as good as sealed. Straws to clutch? We should be so lucky.

First the good news in Zig-zag Year. Inflation is coming down. And there are tentative signs of recovery. They may be hard to discern in a week that has seen a further rise in unemployment, a dismal report from the Scottish Retail Consortium and a warning from the credit rating agency Moody’s putting the UK’s Triple A rating on Negative Watch. There has also been a further lurch towards an explosive Greek default and euro exit, which looks increasingly as if it is what many in Germany really want and are pushing relentlessly towards. No sustained recovery in confidence is possible here until a containment of this crisis. But let’s park, as so many assessments of our prospects have parked, a eurozone meltdown to one side for now.

The fall in inflation, from 4.2 per cent to 3.6 per cent last month on the consumer price index measure, marks the beginning of the end of a corrosive loss in household spending power. And lower inflation is the main source of a recovery in aggregate demand later this year.

Economist Simon Hayes at Barclays Capital calculates that as inflation continues to fall, real disposable income should grow by 1 per cent this year, following a 1.6 per cent decline in 2011. An uplift in household spending should, in turn, give companies the confidence to re-start investment.

Figures this month showed a notably stronger than expected 0.5 per cent rise in industrial output, compared with a 0.5 per cent fall in December. Manufacturing production increased by a robust 1 per cent. This provided some hard evidence that the sector is stabilising after a worrying slide in the autumn of last year. “This appreciable bounce in manufacturing output,” wrote Howard Archer, economist at IHS Global Insight, “is very good news; and together with the improved January survey evidence, boosts hopes that the sector is past the worst and is on course to return to growth in the first quarter, thereby helping the overall economy to also return to growth.”

Nor are tentative signs of an upturn confined to manufacturing. The purchasing managers index for the UK service sector – accounting for some two-thirds of the economy overall – rose to a ten-month high of 56 in January, its third consecutive monthly rise and confounding consensus expectations of a fall. This index now exceeds its long-run average of 55. And the forward-looking expectations balance jumped nearly seven points, its strongest increase since records began. The employment balance also saw the largest rise in nearly four years. This has caused many to speculate that fears of a renewed recession have been overdone.

Homeowners may feel these statistical upticks to be all very well, but doing little for a rock-bottom feel-good factor and a depressed housing market. But house prices do appear to be stable, albeit at lower levels of activity, mortgage lending continues to increase, if slowly, and the latest Royal Institute of Chartered Surveyors survey published this week showed a rise in the number of respondents reporting growth in sales and the balance of those expecting future sales growth jumped from one to 19.

This does not suggest an economy heading for the rocks. And while it must be stressed that we have seen just one batch of monthly statistics and confirmation of these trends will be needed, it does suggest that while its 2013 forecast of 3 per cent growth is fanciful, the Bank’s view of a strengthening recovery by the end of the year looks good. The signals given at the Press conference yesterday by the Bank’s deputy governor, Charles Bean, suggesting a further burst of QE might not be necessary to prevent inflation falling well below the 2 per cent target in three years’ time suggest confidence in an uplift in economic activity compared with the Bank’s previous assessments.

This better survey evidence and appraisal give grounds for hope that the UK’s “annus horribilis” may have passed. But a greater reckoning still lies ahead. Governments in America, Europe and the UK are continuing to borrow heavily to sustain entitlements and standards of living that, in the shadow of colossal debt accumulations, will prove impossible to sustain.

Will western democracies have the political will to stop borrowing and avert financial ruin? A paper entitled The Real Effects of Debt posted on the Bank for International Settlements website analyses debt in 18 OECD countries and argues a danger level for both government and household debt of 85 per cent of GDP, beyond which economies will struggle. And economist Gregory Curtis in a Greycourt paper last month, The End of History (Again), sets out why, on a broad historical perspective we may now be living in a permanent financial crisis. Clutch at those straws of upturn while we can.