Bill Jamieson: Hope builds of a return to growth

Amid warnings of a triple dip recession, signs of new construction could herald a turnaround, writes Bill Jamieson

In THE Edinburgh street where I live, there has been a flurry of excitement. For more than a year, the sandstone building across the road has been covered in scaffolding, yet no evident work was being done. Why was the scaffolding still there? Neighbours had forgotten. Could this become our little Sagrada Familia, the Barcelona cathedral of Antoni Gaudi where work began in 1882 and is still awaiting completion?

Then, last week, workers suddenly appeared. Hopes rose that the unsightly scaffolding was being removed. But instead, yet more scaffolding has been added. Might this be a signal that at last “infrastructure spending” is on the move and that next week we might even experience a sighting of that lost legion of the UK economy: the shovel-ready crew?

We wait in hope. But while we do so, there are signs that the economy overall is already on the move. We may not, or not yet, be in recovery. But it does look as if that “triple dip” recession is being avoided.

How can this be? It cannot be due to fiscal stimulus, of which there has been little. It cannot owe much to those “shovel-ready” projects much vaunted by St Andrew’s House, where in most cases work has yet to start. And it cannot be ascribed to higher Scottish Government capital spending, which turns out in the past year to have been far less than thought. We now learn that of the £353 million allocated for projects by the Scottish Futures Trust in 2012-13, only £20m has been spent.

What makes the recent signs of upturn remarkable is that they owe very little to the government intervention or the application of fiscal stimulus, in which too much faith has been placed. The problems we face are not – and have never been – amenable to conventional government responses of this sort and require a different policy address.

Meanwhile, what of these signs of improvement? Earlier this week we heard that the keenly watched purchasing managers’ survey for the services sector showed a surprise return to growth last month. Activity expanded at the fastest rate for four months in January and incoming new business picked up, pointing to further growth in the near term. Companies’ expectations in the sector also improved to an eight-month high in January, while employment in the sector rose at the fastest rate since last July.

The index measuring overall output in the services, manufacturing and construction sectors climbed to a five-month high of 52.0 from 49.9 in December: growth of sorts.

Retail has been going through a torrid time. But on Tuesday the British Retail Consortium unveiled surprisingly robust retail sales in January. Total sales by value rose by 
3 per cent – double the gain recorded the previous month.

Meanwhile, the latest UK manufacturing purchasing managers’ survey, released last week, provides support for hopes that the UK economy can return to growth in the first quarter, with output growth at a 16-month high. New orders rose for the third month running, while manufacturing employment edged up for the first time in nine months.

All these would seem to bear out other survey data: an upbeat confidence monitor reading from ICAEW/Grant Thornton showing private sector sentiment pointing to output growth of 0.4 per cent in the current quarter, and a rival survey from Lloyds Bank showing sentiment about trading prospects at an 18-month high.

Meanwhile, the Bank of England reports that mortgage approvals rose for a fifth month running in December to hit an 11-month high of 55,785, suggesting that the Bank’s Funding for Lending Scheme (FLS) is having an effect.

Finally, job creation continued to be buoyant in the quarter to November, with employment up by 90,000 across the UK – 552,000 higher than a year earlier – to a record 29.7 million. Significantly, full-time employment was up by 113,000 in the quarter, whilst part-time employment fell by 23,000, contradicting the hypothesis that the job creation was mainly part-time.

For these reasons it is likely that the Bank of England’s Monetary Policy Committee at its meeting today will “look through” the poor fourth-quarter GDP performance, give the Funding for Lending Scheme further time to work and not press the button for further money-printing.

All this, however, leaves us with an almighty puzzle. Why is it that employment in Scotland and the UK has held up so well while the economy is stagnant and output 
still well below the peak levels of early 2008 – and this after £375 billion of Quantitative Easing (£1,500 per household) and deficit spending (£2,100 per household since 2008-9)? Is it really all to do with labour hoarding?

According to a paper from the Centre for Policy Studies last week, a more compelling explanation within the central bank is that 
the economy has become poor 
at capital allocation in the 
aftermath of the crisis. This has led to the survival of unproductive businesses and companies – good news for those struggling companies and their employees, but bad news for growth, which we are repeatedly told is the priority of Holyrood and Westminster administrations.

Official forecasts put medium-term potential growth to 2017 at just 2.2 per cent, way below the 3.1 per cent trend between 1995 and 2008. Bank governor Sir Mervyn King argues that it is not lack of fiscal and monetary stimulus that is holding back the economy, but structural and supply-side factors. If this is the case, then resorting to further expansionary monetary and fiscal policy will not solve the problem.

The need is for a much more radical approach to bank reform, forcing the banks to write down or write off loans to “zombie” companies. Until this is undertaken, that vital function of banking – the efficient allocation of capital – will continue to be undermined.

This is the nettle that needs to be grasped and not sidestepped by tub-thumping on more government spending.

As it is, with state spending now at 49 per cent of GDP – almost certainly higher in Scotland – we are running into the law of diminishing returns. For the bigger the estate of government, the more money is absorbed by maintenance and repair, and the more difficult it becomes to find capital for new projects without raising taxes, cutting back elsewhere or borrowing more: digging the hole ever deeper. No thanks.

Fortunately, there now appears to be a frail and modest pick-up in confidence across households and private sector firms. It will be slow to build but it looks set to lift us clear of that dreaded “triple dip” this quarter.

I may groan about the aesthetic blight of scaffolding covering the flats across my road. But for the sound of those ringing scaffolding poles we should raise a cheer. For a beleaguered construction sector so long in decline, this could just be the sound of an economy on the turn.