Bill Jamieson: Tsunami too late to turn the tide

We are down to the final cards in the Last Chance Saloon. And astonishing though the amount being gambled will be, there is utterly no assurance it will halt a slide into an economic depression beyond anything experienced in living memory in the UK.

Across a broad front – retail, finance, property, services and manufacturing – activity is slowing. The Chancellor, with his debt and deficit reduction targets slipping from his grasp, is in no position to announce anything other than a token “fiscal boost” in the Autumn Statement a week on Tuesday. For those hoping for a big “stimulus package”, forget it: the cupboard is bare.

And over-hanging all this is the sovereign debt crisis in the Eurozone that worsens by the week and could pitch us into an epochal mess.

Yields on the sovereign debt of Greece, Italy, Spain, Portugal and now France were pushed higher last week. Far from progress towards a resolution of this crisis, the mood in political capitals and in markets is getting worse. Strains are now everywhere evident – between Germany and France, Germany and the UK, and Italy, Greece and Spain with the rest of the Eurozone.

Germany is proving no easy push-over amid desperate clamour for European Central Bank intervention to act as the lender of last resort.

As the tension mounts, fears are rising that a sovereign bond default in one country would almost certainly trigger similar defaults elsewhere. Little wonder there were reports last week of an accelerating flight of Asian capital out of the Eurozone on the view that there is now insufficient political will in Europe to take the deficit reduction measures required.

We are dangerously close to a financial failure which would have momentous consequences across the Eurozone and beyond. The prolonged delay in agreeing actions up to the scale required – and a growing fear that it now may all be too late – is tearing at business confidence across all the world’s major economies.

The Euro crisis has now become like an enormous, deafening pneumatic drill, sapping concentration and confidence across the business and financial world. The coalition government seems helpless to intervene in the face of events that now threaten to envelop it to a degree not experienced by any UK government since the 1930s. The surge in London Inter Bank rates last week exposed the growing funding strains among UK banks. And unless these are quickly reversed, this is likely to feed through in an even tighter lending environment.

Hence the likelihood, in early December or in January, of a massive extra monetary injection. The current £75 billion QE programme launched last month is nowhere near enough to make an impact on the scale required. The Bank is now likely to announce a further £100bn in a desperate attempt to boost bank lending and stimulate demand. This would take the total so far to £375bn – a figure for which there is no historical precedent.

How did we get to this? There can be now be no doubt in the mind of any reasonable and intelligent person that we have moved decisively from one era to another. It is one altogether different from the gentle, benign mini cycles of the past 40 years. The accumulation of both personal and government debt, easeful and liberating in its early stages, has turned round to spring a vicious and deadly trap. Over the past decade alone, government spending roared ahead by a massive 53 per cent in real, after-inflation terms – this on an economy that was itself being fuelled by an explosion in personal debt.

Now the debt bubble has burst. And this has worked like a chain reaction explosion, each wave knocking down wall after wall of policy response. Fiscal stimulus packages and ultra-low interest rates have failed to deliver the positive results expected that would contain the destruction and turn the cycle round.

Government ministers take comfort in the way that the yield on 10-year UK debt has fallen to just 2.3 per cent – a lever never before recorded – as some signal of financial confidence or health. It is certainly preferable to being in the eye of the euro currency storm. But beware of drawing false complacency from a bond yield as low as this. It is signalling a near death experience for the economy overall. And the Eurozone crisis may just be doing us a favour to this extent: were global attention not so fixated on the appalling direction of events in the Eurozone, and allowed to appraise the state of our own economy, the lifeblood of demand almost entirely drained, the deficit reduction progress stalled, and the intensifying slump in business investment as petrified companies hoard cash, there would be a ferocious flight out of sterling and UK assets. That may yet come.

Whether it is the unemployment figures last week, the trade deficit, the continuing falls in business confidence surveys, the reduction in household real incomes, rising energy bills, inflation or the latest downgraded GDP forecasts, there is a compelling case for an activist Chancellor. But debt has boxed him in. We should see some modest measures such as encouragement for banks to lend to small firms, help with deposits for first-time buyers, and schemes to mobilise pension fund money for infrastructure projects. But a galvanising, game-changing set of measures it is not.

It is the Bank of England that now has the “big bazooka” and which, through projections showing inflation falling sharply next year and beyond, it is now primed to fire. Michael Saunders, UK economist at Citigroup, expects QE will reach about £500bn in total “and while our QE forecast is far above consensus, we do not view it as a very aggressive forecast”,

The other bazooka is in the government’s hands to fire: a sweeping away of a shed load of employment regulation that has swollen sixfold over the past 30 years, with compliance costs for UK business estimated at £112bn this year alone. According to the Centre for Policy Studies, another £23 billion in costs on business will be imposed by 2015. But here, too, action, if any, will be limited. Unemployment, it seems, is not yet high enough.

Truly we are locked in to an era of slow to no-growth, squeezed incomes, a collapse of business investment – and the rising prospect of a collapse in the Eurozone. A new, dark era this most certainly is, and with implications such as to make even this bleak forecast seem benign.