Comment: ‘Steady as she goes’ belies a nightmare

A RECURRENT theme in George Osborne’s Budget last week was that, after one of the most severe recessions for a century and a massive increase in government deficit and debt, the UK economy was steadily getting back to normal. Indeed, even better than normal: unemployment falling further, record numbers in work, the GDP growth forecast raised (if only fractionally), deficit reduction coming in below the previous target (at last) and an improving trade deficit.

As the Budget speech unfolded it became increasingly difficult to tell how much of all this good news was the result of good judgment or good luck. Coming as it did just five weeks ahead of a general election with the Conservatives struggling to establish a convincing lead, the suspicion is hard to erase that much of this return to “business as normal” was due to good luck.

One evident symptom of a return to normal were the projections of public sector net debt tumbling as a percentage of GDP the further we looked out to the far horizon.

This was eerily familiar for those who followed the budgets of Gordon Brown’s golden years – consistently falling debt and deficit numbers the further out we gazed. No landscape swept clean of deficit and debt was ever reached. On the contrary.

A similar trompe l’oeil marked last week’s Budget, with tumbling debt projections shown as a share of GDP – a result that may tell us more about the fancied trajectory of GDP than an absolute fall in debt.

In truth, there is little that is normal about the times we are in. Pull back to take a wider view of what we are now expected to regard as “normal”.

The UK economy is still forecast to grow, despite slowing global trade. The pound is roaring against the euro but is sharply down against the dollar: an unusual and unhelpful combination for UK exporters. But never mind – the UK stock market, as shown by the FTSE 100 Index, smashed through the 7,000 barrier on Friday to an all-time high.

The spectre of deflation, once thought to be confined to Japan, has spread to Western economies. Swiss savers no longer receive an interest payment for depositing money but a penalty. Rates have turned negative in nominal as well as real terms. So what is the point in paying money into a bank only to watch it shrink?

Meanwhile, official UK interest rates remain at a crisis level. These emergency rates, coupled with quantitative easing, have not, as widely predicted, ignited an inflationary fireball. It is the reverse that now worries the IMF and G8.

The latest guidance from Andrew Haldane, chief economist at the Bank of England, is that, far from deflation concerns subsiding here, interest rates are as likely to be cut in the year ahead as raised.

The oil price, far from remaining firm in the wake of the global economic upturn of recent years, has collapsed from a level of $115 a barrel to around $55 and does not look likely to return to $80, never mind $100 a barrel, any time soon.

As a piquant rider to this, support for the SNP, far from evaporating as projected oil revenues in 2016-17 are now forecast to plunge from a Scottish Government projected £10.7 billion to barely £600 million, has, on the contrary, grown even stronger.

Government spending plans do not show the work of a moderating hand, smoothing out the peaks and troughs. Instead they are destined, in the words of the Institute of Fiscal Studies, for a roller-coaster ride: a £30bn squeeze in the next two years followed by a surge in 2019-20. Weren’t governments meant to iron out the peaks and troughs of the cycle instead of injecting ones of their own?

And in the face of all this, the Chancellor felt sufficiently emboldened in his Budget speech to echo an extraordinary projection made in January – that the UK economy could overtake Germany by 2030. Within just 15 years, he declared, “we have the potential to overtake Germany and have the largest economy in Europe. Five years ago, that would have seemed hopelessly unrealistic; economic rescue was the limit of our horizons.”

The projections, first aired three months ago by the Centre for Economics and Business Research, show that the UK has already overtaken France and reckons that we will overtake a German economy hamstring by low Eurozone growth.

How is all this a return to normal? You would need to be standing in a gallery of works by Salvador Dali with his melting clocks and giraffes with necks comprised of kitchen drawers to describe this as in any way “normal”.

Little wonder that HSBC economists in their latest assessment conclude that the world economy is looking increasingly surreal, so much so that policy-makers are really struggling to deliver the economic outcomes they’d ideally like to see. The usual rules of the game no longer apply.

Deflation, they say, has become a major headache for central bankers across an ever increasing number of countries. World trade growth has been disappointingly weak.

Some central banks are attempting to export home-grown deflation via currency depreciation. Others increasingly fear a collapse in inflationary expectations that could threaten negative effects both within the financial system and across labour markets more broadly.

In the world of monetary policy, they conclude, we are all too quickly entering a Dali-esque world in which oddities abound.

In recent weeks there has been talk of an imminent rise in US interest rates. But this may be premature. The danger, they warn, is that it might be followed by an embarrassing reversal: the experience of the ECB and Swedish Riksbank in 2011, the Bank of Japan in 2000 and, for students of history, the Federal Reserve itself in 1937.

All this is not “back to normal” but a new phase in an extraordinary era where very little is familiar at all – and much of it is truly disturbing. «