Bill Jamieson: ‘By any measure, we are crawling along the bottom’

BEFORE the towel is thrown in, beware of assurances that everything is going to plan. Statements that we are on the right economic course are about to be punctuated by the sound of not one, but two giant sweat-soaked towels thudding onto the floor.

The problem is simply put. It is not just that the economy has failed to follow the recovery trail set out in official forecasts when George Osborne embarked on his austerity programme (or spending constraints marginally tighter than those envisaged by Labour) back in June 2010.

It is that, as far as forecasters can see, there is no recovery in sight – this year or next. The dials are reading zero. And with the Bank of England’s Monetary Policy Committee concluding at its last meeting that the Eurozone sovereign debt crisis “is likely to act as a drag on growth for the foreseeable future”, it now appears we are mired in a recession/recovery aftermath longer even than the 1930s Great Depression and indeed the longest period of nil-to-low growth for 100 years.

In truth, a better comparison may be with an earlier great depression which stretched from 1873 to 1896. As Stephen Lewis of Monument Securities points out, this did not display the extreme symptoms of mass unemployment and soup kitchens, but was characterised by a general, long-lasting economic malaise similar to what we are now experiencing.

This is not where Mr Osborne counted on us to be either in 2010 or in 2011. For the record the June forecast from the Office for Budget Responsibility was that the UK economy would grow by 2.3 per cent in 2011. The latest official estimate is now 0.9 per cent.

For 2012, the OBR forecast back in June 2010 the economy would be growing by 2.8 per cent. Last year that forecast was shaved to 2.5 per cent. The latest 2012 forecast from investment bank Citigroup is for growth of just 0.2 per cent.

For 2013 the OBR forecast in June 2010 that growth would hit 2.9 per cent. In March of last year this forecast was maintained. The latest stab by Citigroup is 1.0 per cent.

Let’s avoid the familiar lament over economic forecasting. We are where we are, or more accurately, not where the government clearly thought that we might be. And it needs to find a way of delivering a stimulus that will not ignite a further upward spiral in public borrowing.

This matters, for several reasons. First, higher employment and stronger consumer demand were predicated on those earlier growth numbers being achieved.

Second, Mr Osborne’s debt and deficit reduction targets clearly rested on this growth recovery starting in 2011 and strengthening into 2012-13.

And third, without evidence of recovery, public confidence and belief in the government’s strategy will be vulnerable. There is a limit to how much longer we are prepared to go along without something more substantial than Micawberism. For before too long a despairing lassitude will set in. Nothing will seem worth doing, and nothing needs to be ventured because there is no money for anything. Thus is the British economy now moribund.

Whether measured by service sector growth, manufacturing activity, business investment, retail sales or domestic demand, we are crawling along the bottom.

Unemployment is rising to three million and searching questions are being asked as to how long those in charge can maintain the line that we are still “on course”. On course for what?

The nearer we draw to the Budget (Wednesday 21 March) the louder the questions will grow about the credibility of the government’s course. Can Osborne really get away with a third Budget based on the same strategy and expect it to command credibility in the Commons and the country?

That is the background to the throwing in of two giant towels.

The first is likely to come on 9 February, a week on Thursday when the Bank of England announces a further substantial increase in quantitative easing. Estimates range from £50 billion to as high as £100bn.

Remember that this is the second wave of money printing and comes against a backcloth of extraordinary policy measures already in force – ultra low interest rates of 0.5 per cent, which have failed to ignite a lending recovery; a cut in corporation tax; a fall in sterling and a plethora of business stimulus measures in the last two Budgets, which seem to have disappeared without trace. According to latest data, the economy shrank 0.2 per cent in the fourth quarter of last year and the latest CBI Distributive Trades Survey released last week was dismal.

Even if the economy does not shrink further, this is the worst recessionary/recovery cycle of the past 100 years for the UK outside major world wars and with all the major policy stops already pulled out.

So this begs the question: what is it that the next dollop of QE stimulus is likely to achieve when all previous injections have failed?

So far, the QE money appears to have ended up resting in bank coffers helping to improve their balance sheets with little coming out the other end in the form of higher lending to the non-financial business sector. In this context, it is not an issue of capital availability alone, or the length of time it takes for output to recover to its pre-crisis level, but the psychological mood within the banks themselves.

A mood of deep caution prevails. A new generation of lenders is deeply fearful of repeating the errors of their predecessors in lending decisions.

And it is not just sovereign lending that is the subject of caution but almost any and every commercial business or enterprise proposal. It will take years before fear of repeating the last great error relaxes its grip. We should not, of course, overlook the invisible benefits that QE has brought: it may have spared us a real Great Depression experience – a greater deterioration than would otherwise have been the case. How much worse it could all have been.

But from the Chancellor’s point of view it would be a high risk strategy simply to rely on QE to lift our rock-bottom spirits and with these our sunken economy off the bottom of the sea. Hence the talk of tax cuts – and well ahead of the normal period for such pre-Budget speculation.

Deputy PM Nick Clegg struck last week with a call for tax cuts targeted at those on low incomes. The urging of tax cuts by a Liberal Democrat onto Conservative coalition partners determined (so far) to resist does fall somewhat oddly on the ear. But the economic rationale may be stronger than the obvious political one. Tax cuts aimed at the lower end of the income spectrum may be more likely to be spent, providing a badly needed fillip to consumer demand, thus administering a stimulus effect. This would, in time, both lift tax revenues (more raked in from VAT) and reduce unemployment costs – or at least achieve a slowdown in the rate of increase in unemployment.

Income tax cuts in the Budget targeted at the low paid would both provide a fillip and suggest the government really is serious about doing all it can to trigger a recovery. Without it, there is a real risk of a dispiriting entrapment: with nothing to hope for over at least two years. Public resignation may curdle into something worse. What we do know is that, on present reckoning, the coalition is staring at defeat. And if it has nothing to offer, what is the point of being in government?