Bill Jamieson: Don't expect red box bonanza from Mr Cheerful
These questions have become all the more pertinent with the continuing rise in interest rates in the US – the Federal Reserve increased the Fed Funds target range by 0.25 per cent to 2.00-2.25 per cent last month and another 0.25 per cent rise is expected by the end of 2018 – and the rise in the oil price, up 43 per cent since a year ago to more than $80 a barrel.
These have combined to trigger sharp falls in global stock markets in the past week, and notably in the US, where investors fear that the growth surge to four per cent, fuelled by President Donald Trump’s tax cuts, will now cool off. A stock market sell-off has been expected for some time after the record run – at ten years the longest bull market period in living memory.
As for the effect of the oil price rise, a paper from Oxford Economics last week argues that while it expects the price to ease back a little to average $77 a barrel in 2019, the global impact will be more marked than the protectionist measures so far implemented. It calculates global GDP to have been dampened by 0.2 percentage points this year and to be reduced by a further 0.7 percentage points next year.
And it could get worse. Markets have become concerned again that oil price rises have further to run, as the impact of US sanctions on Iran bites and is exacerbated by supply problems elsewhere (notably, Venezuela) and a reluctance by Opec to fill the gap.
What if oil hits $100 a barrel between now and the fourth quarter of 2020? “Higher oil,” it warns, “could exacerbate global recession risks just as other cyclical and trade risks are growing.” Its $100 a barrel simulations imply an average fall in global GDP growth of 0.3 percentage points from baseline in 2019 and 2020 and an average increase in global inflation of 0.7 percentage points over the same period.
Such small-seeming adjustments could tip the advanced economies into a growth decline – and also bear down on any “sunny uplands scenario” the Chancellor may seek to paint.
Lacklustre though our economic performance has been, it has managed to stave off, for now, the premonitions of Brexit disaster that have dominated economic commentary for the past two years – though that could change markedly in the next few weeks. Manufacturing improved modestly in September while construction and services were mixed at best. The second estimate of GDP for the second quarter showed growth of 0.4 per cent over the previous three months and was running 1.2 per cent higher than a year earlier.
But the warm weather “summer buzz” looks to be over. Global financial information services company Markit expects GDP to rise by 0.4 per cent in the third quarter, lower than the Bank of England’s forecast of 0.5 per cent and the National Institute for Economic and Social Research’s (NIESR) at 0.6 per cent. And two recent surveys – one by RBS on the Scottish services sector and another by the British Chambers of Commerce – were downbeat, with the BCC warning that the UK economy was now stuck in a rut.
The annual growth of consumer credit slowed further in August and since then, according to the Bank of England, has been the lowest since August 2015. Meanwhile, the balance of payments current account deficit widened to £20.3 billion in the second quarter compared with £15.7bn in the opening three months of the year.
What then of public spending and borrowing and the outlook for taxes? Government borrowing has been falling steadily while Total Managed Expenditure (TME) as a percentage of GDP has been falling since the 2009 financial year when it was nearly 45 per cent, but it was still relatively high at 38.5 per cent in the last financial year.
Pressure will grow on the Chancellor to take the brake off public spending in the Budget package for all manner of compelling reasons – more money for the NHS, a restoration of the £2bn cut to the universal welfare package ordered by former chancellor George Osborne, and a much-needed boost to infrastructure spending, not least on road repair and maintenance.
But as Ruth Lea, economic adviser to the Arbuthnot Group, points out, this would be to overlook the fact that the tax take as a percentage of GDP is already at 34.3 per cent, the highest since 1969 when it was 35 per cent – nearly 50 years ago.
Context matters here. Spending grew rapidly in the 2000s, easily outstripping the underlying growth in the economy. “This pattern of spending,” Lea argues, “was clearly not sustainable. It was not ‘affordable’. And the efforts by the Coalition Government (2010-2015) to control spending should be seen as the normalisation of spending after a spending splurge, rather than heralding public sector ‘austerity’.
With public spending tipping the scales at £800bn and still around 38.5 per cent of GDP, we do not, arguably, have ‘austerity’ at all.”
That’s hardly a line that the Chancellor would dare to advance in the Budget on 29 October. As for those “sunny uplands” of higher growth, do not expect Mr Hammond to change his normal lugubrious demeanour and step forward as Mr Cheerful.
According to Focus Economics, growth is likely to be fairly limp going forward, as temporary factors which have propped up the economy in recent months subside, fixed investment continues to be depressed by Brexit uncertainty and export growth slows after the temporary boost provided last year by the weaker pound.
A slight pick-up in government spending should provide some support. But failure to reach a Brexit agreement with the EU is the key downside risk. The group’s panellists estimate GDP growth of 1.3 per cent in 2018 and 1.4 per cent in 2019, unchanged from last month’s forecast. Stuck in a rut, indeed.