Bill Jamieson: Five years on, future’s still bleak

We’re in the icy grip of an economic freeze and there’s little sign of a thaw any time soon, writes Bill Jamieson

CAN it really be as bad it looks – five years since the great global banking crisis struck and barely any sign of a pick-up on the horizon? There are signs of recovery and good reason to believe that bank lending to the private sector is slowly beginning to recover. But there is a hidden time-bomb ticking under the corporate sector.

Judging by the tone of Bank of England Governor Sir Mervyn King’s remarks yesterday, there is little by way of policy change at hand. Within the Bank of England there may be a growing sense of an era coming to a close and a new one soon to dawn as a new governor takes over from Sir Mervyn next year.

But outside nothing much is changing. And within the Bank there is the same fearful hesitancy, the baleful repetition of glacial recovery at best over the next four years, the sense of policy in thrall to the swirling tear gas across the eurozone and little by way of new ideas. King welcomed the UK-wide fall in unemployment but warned that recent positive economic data may not be a good guide to the future.

In what former chancellor Alistair Darling once icily described as the “hall of the sun king”, the Bank has little by way of hope or encouragement to offer. The latest inflation report intones a bleak summation of our prospects. Its forecast for growth has once more been scaled down. Five years on from the banking crisis, growth is forecast at just 1 per cent and the recovery will be “slow and protracted”. Output will stay at pre-crisis levels for the next three years.

King warned the UK faces an “unappealing mix of a weak recovery and high inflation.” As one economist put it yesterday, the outlook is pretty DIRE – Disappointing Inflation and Rotten Expansion – in marked contrast to the NICE decade Sir Mervyn used to describe the world before the 2008-9 recession – Non-Inflationary Consistent Expansion.

Even for those broadly sympathetic to the governor’s position – that there is massive commercial bank and household de-leveraging still to be undertaken and this cannot be avoided – the prospect of an end to the constantly lugubrious and downbeat economic assessments cannot come soon enough.

And all this comes after almost three years of ultra-low interest rates and the resort to monetary stimulus on a scale that would have sent an earlier generation of economists running for the hills.

Quantitative easing has now extended to £375 billion, accompanied by a funding for lending scheme specifically designed to boost commercial bank lending to the private sector. But we still seem caught in the biggest economic freeze for a century.

Policy options look limited. Despite the pause agreed at the latest MPC meeting last week, the prevailing interpretation of the governor’s remarks yesterday is that the QE programme will once again be extended by another £50bn in December or January of next year, taking the total to £425bn. He said he had not lost faith in QE. But why has it not had a bigger positive impact? And how much more slack can the Bank dare to cut, bearing in mind the inflationary dangers of this constant pump priming? As it is, the Bank has also scaled back its projections of a stable-to-falling inflation rate. This is now forecast to rise back up to 3 per cent, pointing to another extended failure by the Bank to meet the 2 per cent inflation target set for it.

Many at Westminster and the Treasury will be glad to see the back of the most miserable Bank of England governor since the 1930s. Alistair Darling has not forgiven King for what he saw as prevarication and delay at the height of the Northern Rock disaster and his perceived inability to grasp the scale and urgency of the crisis. Politicians also care little for what they see as his aloof and condescending manner.

Supporters, by contrast, say he has been consistently honest, that his downbeat prognostications have proved far more accurate than Whitehall. They also share his reluctance to see the central bank being dragged into acting as little more than an arm of fiscal policy. If politicians want stimulus, why don’t they cut tax or lower tax thresholds?

This cool distance from the hot flushes of the politicians has earned him no favours. But it is doubtful that any of the mooted successors would act very differently – though the rhetoric and tone may be.

The immediate problem is a lack of follow-through from the bigger than expected 1 per cent jump in GDP in the third quarter. This growth may have owed much to one–off factors, including ticket revenue from the Olympics, giving “an overly optimistic impression of the underlying trend,” King said. However, the jobless rate (Scotland excepting) did fall to 7.8 per cent in the July-September quarter, down from 8 per cent in the previous three months. The 49,000 fall in the number of jobless, to 2.51m was almost entirely due to a fall in youth unemployment. However, the claimant count went up in September.

As for earnings growth, this dipped to 1.7 per cent in September, significantly lower than the rate of inflation now set to hit 3 per cent and renewing the squeeze in real living standards. Pending rises in utility prices mean the squeeze could persist. However, an increase in personal allowances next April should provide some cushion.

Arguably, much more worrying is how long the corporate sector can withstand such a prolonged period of virtually no growth. A section in the inflation report specifically airs concerns about the forbearance of banks and business owners during this crisis. “In particular”, it notes, “forbearance by banks on existing loans, coupled with the low level of Bank Rate, may have allowed businesses that will face lower demand in the longer term to continue trading. Although such forbearance may have allowed some viable businesses to remain in operation through a temporary period of weak demand, others may find it hard to compete in their markets when demand recovers.

“It is difficult to judge how significant this effect has been. But company liquidations have risen only modestly since the 2008-9 recession, especially compared with the rise following the 1990-91 recession, even though data from companies’ accounts suggest that the proportion of companies making a loss has picked up sharply since 2007.”

Of all the downbeat notes struck yesterday, this is by far the most worrying. It threatens to haunt the economy and the Bank – whoever is chosen as governor next year.