Bill Jamieson: No real reasons to be cheerful

TV and newspaper coverage has at times bordered on the hysterical. But given the alternative news agenda, not many are complaining. For a whole fortnight, “good news” may be set to top the schedules with the wearisome dead weights of recession, the Eurozone crisis and the miserable summer weather pushed to the side.

The Games have boosted confidence in what we are individually capable of. And as confidence is central to a business and household recovery, how can we spread it round and make it last? For such are the omens, I fear we will be in sore need of an extension of the feelgood factor come the end of the month.

The UK economy has now been locked in stagnation or outright decline for four years. We have become so used to government and central bank stimulus measures that the idea of a non-responding economy or outright policy failure is almost impossible to grasp. But this is the condition in which we now find ourselves. Government measures to reduce the deficit and the burden of debt are foundering. And strenuous efforts at monetary stimulus by the Bank of England have failed to kickstart a recovery. Contrary to consensus predictions that we would be pulling free by now, the latest pointers are not at all reassuring. Take last week’s crop of data:

≤ The July CBI Distributive Trades Survey was notably weaker than hoped, knocking back hopes of an economic recovery in the third quarter after the deeply disappointing news of a 0.7 per cent GDP contraction in the April-June period.

≤ The July Purchasing Managers Survey for manufacturing was, in the words of Global Insight economist Howard Archer, “absolutely dreadful”. It showed a fall to its weakest level for 38 months. Hopes that the manufacturing sector could see a recovery in the third quarter after the ONS estimate of a 1.4 per cent output plunge in April-June have been knocked for six. The survey also pointed to substantial falls in new orders, export orders and backlogs of work.

≤ Retail sales in Scotland by volume fell by 0.3 per cent in the April-June quarter and grew by just 0.6 per cent annually – the result both of utterly miserable summer weather, which hit the retail and clothing sectors particularly, and the continuing squeeze on household incomes.

≤ Construction is continuing to have a miserable year. While the sector Purchasing Managers Index for July showed a small upturn, most expected better after the two-day public holiday in June and the wet weather. Activity readings are among the lowest since early 2010 and show declining housing and civil engineering activity. And a second successive drop in incoming business (the first time this has happened since the third quarter of 2009 in the survey) does not bode well for construction activity in the near term.

≤ Arguably most disappointing of all last week was news that the July Purchasing Managers Index for the dominant service sector (accounting for two-thirds of the economy). This put expansion at a 19-month low. With very little evidence of a new orders upturn in the pipeline it hardly looks as if we are on course for an upswing of any sort in the third quarter.

Thus we are becoming slowly wise to the reality, not just of an economy unresponsive to conventional policy measures, but of a malaise that may extend for years ahead. What, then, are we likely to see by way of official response when “nothing happens”?

More of the same, I sense.

The policy response this autumn is likely to see more monetary stimulus by the Bank of England with yet more quantitative easing on top of the £375 billion already approved, and further government micro measures to help encourage the supply side of the economy. The assumption is that at some stage “more of the same” will, by a process of attrition, push back the recessionary forces and allow the economy to grow. But conviction is faltering.

A major drag on business confidence continues to be the Eurozone – less the reality of recession for the UK’s major export market than the fear of a financial conflagration if concerted action cannot be agreed.

For a brief moment it looked as if some real progress was about to be made in resolving the crisis. European Central Bank governor Mario Draghi boldly declared that the bank would “do what it takes to save the euro” and that this “will be enough”. But barely had this firm statement of resolve boosted financial markets than it was duly followed at the ECB’s council meeting last Thursday by a notable condition: countries in need of help in bringing down those sovereign debt yields must formally request assistance, thus triggering a bail-out request and requirement to pursue further austerity measures. Both the Italian and Spanish premiers have made clear they have no intention of making such a request, for to do so could trigger a political and social explosion.

So we are now back to the impasse: more indecision, more delay, with the next ECB council meeting weeks away and the markets in explosive mood. Will they hold out till the end of the month? Here, too, the omens are not good. The spectre of a Greek exit from the euro – and, more worryingly for the UK, fears of contagion triggering major turbulence in markets – will keep us on edge this autumn.

But just as daunting are the domestic problems facing UK banks. Much hope is vested in the Bank of England’s £80bn “Funding for Lending” scheme which went into action last week. It is by no means certain that the banks’ lending departments will choose to respond in the manner desired, or that there will be a surge in business demand for loans: many of our biggest companies continue to add to their cash hoards. These are the wretched factors that could turn this recession into a historic marathon: not at all an Olympic record anyone would care to see.