There is now every prospect of the economy emerging from recession in the July-September quarter and that we should see a firm return to growth in the final quarter of the year.
If that was the end of the story we could now pronounce our problems over. Business confidence – a mightily self-reinforcing phenomenon – would see a pick-up in investment and borrowing. Unemployment would fall as the economy gained traction. And the wretched public finances would at last start to show improvement as tax revenues rose and the budget deficit fell.
When the business cycle turns up, it really is a powerfully reinforcing virtuous circle. That is why growth matters so much in our economy, and policies designed to encourage it are so vital. But it could well be that deeper structural problems lie ahead.
Right now, I’m not sure who to thank for the green shoots that have started to appear. I wouldn’t rule out a “stuff it” factor among many in the private sector – exhausted by the constant bombardment of bad news almost every night on the BBC news and grim analysis in the papers. It may even have been the Olympics that broke through the hypnotic, debilitating trance of miserablism and self-doubt. Whatever it was, there is no doubt the mood in business and in markets has changed notably over the past six weeks.
Let me list the “green shoots” sightings:
1Service sector output grew by 1.1 per cent month-on-month in July. The rebound from a 1.5 per cent “Diamond Jubilee” dip in June was led by the hotels and restaurants sector, where output climbed 1.6 per cent month-on-month. Finance and business services also saw decent growth (plus 1.2 per cent) and transport and storage was up by 1.1 per cent. Given the dominant role of services in the economy, this has helped to boost hopes of stronger growth across the third sector overall.
2After being flat for three months, consumer confidence moved up to a 15-month high in September. The GfK NOP index climbed to minus 28 in September from minus 29 in August-May, and minus 31 in April and March. The modest lift in confidence was due to consumers becoming marginally less downbeat about the economy’s performance over the past 12 months and a little more hopeful about their personal financial situation over the coming year.
3The Office for National Statistics continues to lower its estimates for the extent of UK economic contraction in the second quarter. This has now been trimmed to a fall in Gross Domestic Product of 0.4 per cent quarter-on-quarter. This is down from 0.5 per cent quarter-on-quarter previously reported and takes the downturn in the second quarter to almost half the 0.7 per cent quarter-on-quarter drop initially estimated.
Arguably more encouraging was news that the squeeze on consumers eased in the second quarter as real disposable income climbed by 1.9 per cent quarter-on-quarter. All this has led economy-watchers to predict GDP growth of about 0.6-0.7 per cent quarter-on-quarter.
Howard Archer of Global Insight said: “We believe that there is a good chance that the economy has exited recession and is now eking out very limited underlying growth, helped by a reduced squeeze on consumers’ purchasing power and a resilient jobs market.”
4The CBI’s Distributive Trades Survey for September showed that the balance of retailers reporting sales up year-on-year improved to plus 6 per cent in September, after relapsing to minus 3 per cent in August from plus 11 per cent in July. September’s reading was marginally above the monthly average during the first eight months of 2012. Among the sectors seeing the strongest performance in September were grocers, chemists and footwear and leather. The survey also indicates that retailers are reasonably confident about near-term sales prospects, with a balance of plus 15 per cent expecting sales to be up year-on-year in October.
It all looks much more encouraging than just a few months ago. And even a modicum of good news will, I believe, have a powerful effect on business confidence. Even a break from the doom-laden pronouncements about the Eurozone will have helped the national mood.
That said, these are frail shoots indeed and are vulnerable to being killed off should the Eurozone crisis re-erupt.
Concern will now shift to whether these green shoots can mature, given that the western world’s economies have changed considerably over the past decade and may not be as capable of turning survival into growth.
There has been, here and in America, an underlying structural deterioration in our economies and it is this, in the view of HSBC economist Stephen King and his team in an analysis this weekend, that explains why the response to “quantitative easing” has been slow to appear – and muted when it does. What was once merely an absence of demand will now become shortage of supply.
King said: “The longer the industrialised world has endured economic permafrost, the more its difficulties have become structural in nature … From labour market weakness to fiscal nightmares, our growing economic difficulties cannot be easily resolved simply by a wave of the monetary magic wand.”
The deteriorating trade-off between lower than hoped for growth and stickier than expected inflation, they argue, suggests that no longer should American economic problems be regarded as purely cyclical in nature. Already struggling to cope with elevated commodity prices – in part, an unintended consequence of earlier quantitative easing – the US is now dealing with a decidedly sick labour market.
A massive increase in long-term unemployment has been accompanied by a persistent decline in the participation rate, suggesting that some workers have simply given up looking for employment. Here in the UK we have seen employment rise, but output weaker. This drop in productivity suggests that any near-term labour market improvement may not last.
“The evidence increasingly suggests that quantitative easing in its various forms is not delivering the expected results.” And it is this, they argue, that explains why official economic projections in both the US and the UK have proved far too optimistic over the past couple of years.
Plenty then this weekend to cheer about – and equally as much to give pause for thought on our longer-term prospects.