George Kerevan: Don’t count economic chickens too soon, David
IF Cameron thinks Britain has turned a corner, he should think again. The truth is, the UK economy has flatlined, writes George Kerevan
DAVID Cameron must be thinking there is a God after all. Last week he had a run of appalling bad luck – or serial incompetence, depending on your point of view. There was the Prime Minister’s bizarre, off-the-cuff announcement of a very un-Tory interference with the commercial pricing of gas – a policy retracted by the following morning. Then came the tardy sacking of the chief whip, Andrew “pleb” Mitchell, followed closely by the Chancellor’s embarrassing run-in with a Virgin ticket collector.
But yesterday’s sunrise brought some good news for Mr Cameron’s wobbly administration: the UK is officially out of double-dip recession. The economy grew by a whole one per cent in the three months to September, much better than expected. Taken with last week’s positive jobs figures – a rise in employment of 212,000 in the quarter to August – Britain looks, on the face of it, to have turned an economic corner.
Meanwhile, in the eurozone, yesterday brought a dangerous new development. Unexpectedly, the growth of private sector credit has begun decelerating – which implies the European economy is in worse trouble than everyone thought. This was compounded by news that factory output has plunged in Germany. So Number ten might be forgiven for thinking the worst is over in Britain while only getting worse across the Channel.
I’m sorry to be the bearer of bad news, but David Cameron should not count his economic chickens too soon. The very fact that Europe remains locked in an austerity-fuelled downturn should be warning enough. The EU is Britain’s main export market and Europe is not buying. That accounts for Thursday’s other significant news: the closure of Ford’s transit van factory in Southampton and the transfer of production to Turkey.
The simple truth is that the UK economy is not growing – it has flatlined. Output is roughly where it was a year ago, even when we include the one per cent summer boost announced yesterday. Two out of every three new jobs being created are part-time. The UK construction industry is still in sharp decline: in the three months to September it contracted by 2.5 per cent.
As for what caused the summer up-tick in GDP growth, there is an obvious answer – the Olympic Games in London. A fifth of the quarter’s economic growth is accounted for by Olympic ticket sales. Half the much-trumpeted rise in UK job numbers during the summer was concentrated in London, another Olympic bonus. Unfortunately, unless Mr Cameron plans to hold an Olympic Games every three months from now on, none of this economic gain is going to be repeated. In fact, the reverse is about to occur. Chancellor Osborne has announced an extra £10 billion will be lopped from welfare spending, thus negating the £9bn spent on the Games. Did someone say “economic blip”?
We need to understand the underlying problem facing the UK economy before we can fix it. Britain is suffering from what economists call a “balance sheet” recession. During the recent boom, households ran up unsustainable debts using credit cards, cheap mortgages and equity release. This fuelled a housing bubble that made everyone feel rich enough to borrow even more. Banks also ran up galactic-sized debts with each other in order to lend to households. The bubble burst when the housing market stalled and banks could not repay each other.
The aftermath is that households and banks have a big debt monkey on their backs. Retail sales won’t recover until this debt goes away. Nor are banks willing to lend to businesses until their own balance sheets are back in order. To make matters worse, profitable UK firms are saving money rather than investing as consumption is so weak.
There are three ways out of this impasse. First, through exporting. But Europe’s economic woes make that impossible.
Second, we can have a bout of inflation to eliminate all that debt. This may be one reason the Bank of England has ignored its inflation target for years. Unfortunately, if you go down this road you will penalise savers and pensioners.
Third, you can boost public spending to give the economy a kick-start. This would allow households and banks to deleverage quickly, without plunging the economy into recession. Then, you can ease out the fiscal stimulus. Unfortunately, the coalition has rejected this approach and imposed austerity instead. Adding austerity to the existing indebtedness of households and banks is what caused the double-dip recession at the end of last year.
Here is a great paradox for David Cameron and George Osborne to contemplate. The mini-fiscal boost associated with the Olympic Games has produced the summer jump in GDP. Yet Cameron and Osborne continue to reject Plan B – a broader fiscal injection designed to grow the economy during the required period of private deleveraging.
Meanwhile, if you’re anxious to know what happened to Scottish GDP in the third quarter, the numbers won’t be published until 23 January (a scandalously long time). The UK and Scotland were both in recession for nine months until June. However, the contraction in Scotland for the first six months was much less than in the UK – implying Scotland was being dragged down by national factors. In April-June, both economies slowed by the same amount (-0.4 per cent). But thanks to the determination of the Scottish Government to maintain capital spending, construction grew by 2.0 per cent north of the Border while falling in the UK – another proof that a targeted fiscal stimulus can work.
It’s too early to say where the UK economy will go next. Factory orders have shown a surprise fall this month, according to the CBI. Even if we don’t get a triple-dip recession, my worry remains that Britain’s private debt mountain could depress demand for a long time, leaving the economy stranded in Japanese-style stagnation.