Peter Jones: A coalition of economic confusion
Far from promising a bright future, the mid-term review of Cameron and Clegg unveils a dull, dark fog, says Peter Jones
From the midterm review of the UK coalition government’s programme published yesterday, political attention will switch rapidly to the future of welfare when the House of Commons debates today the proposed 1 per cent cap on benefit payment increases. Yet it really is the economy which ought to be dominating political discussion for, without growth, Britain will be stuck in austerity for longer and longer.
I had hoped the review would give me reasons to be cheerful, but I heard little to lift the January gloom. The statements by David Cameron and Nick Clegg and the following press conference sounded more like two party leaders primarily concerned to convince themselves and their MPs that they are on the right track rather than to inspire the country that Britain is forging ahead.
Asked directly whether Britain would avoid a triple-dip recession, both men avoided giving a direct “yes”. Mr Cameron only went as far as pointing out that most independent forecasts predict UK growth next year, but forbore to mention that the latest available consensus forecast is for a meagre 1.1 per cent growth in 2013.
He then added that there were lots of uncertainties in the world economy, giving himself a get-out clause even if that doesn’t even happen. The message was pretty clear: neither the Prime Minister nor Deputy Prime Minister have much confidence about the economy.
Of course, Mr Cameron is right to note the uncertainties. There are lots of them, particularly surrounding the eurozone. There is also an interesting comparison to be made between the European and American economies, for prospects across the Atlantic now begin to look a lot brighter.
Six main reasons for that can be picked out, providing a useful checklist to see if Britain has any chance of emulating the US.
First, America is benefitting from cheap energy. The boom in shale gas and oil exploitation has cut gas prices to a quarter of what they are in Europe, while the US crude oil price is a fifth lower. This doesn’t just give industry a big cost advantage, it also feeds through to lower household and office heating costs. Thus, even though unemployment is a big problem in America, US household and transport costs are lower than in Europe.
That helps to sustain consumer demand. But, while the coalition government has approved more shale gas exploration, and the geological evidence is that there is plenty of it, our much denser population and the fact that landowners have no mineral rights, as they do in the US, means that cheap shale gas isn’t coming along any time soon, not in Britain and still less so in Europe.
Second, much of America’s trade is with the growing economies of China, Latin America, and Canada. The bulk of Britain’s trade, by contrast, is with stagnant Europe. True, Mr Cameron did pick out statistics that British exports to China and Brazil have grown strongly in the last year, but these are a small part of our economy.
He also was pleased with the fact that Britain became a net exporter of cars last year for the first time since 1976, but this is more due to a big dip in imports of expensive BMWs and Mercedes than to a boom in exports.
Third, America is still a highly innovative economy. It leads the world in consumer electronics, a technology which is moving forward with dramatic speed. Much the same is true with biotechnology and pharmaceuticals, products for which demand is accelerating in the developing economies.
Britain has some expertise in these areas and some companies are doing remarkably well, but again they are a smaller part of the British economy and while we are good at innovating, we are not so good at turning ideas into products.
This is partly because of the fourth factor, that it takes investment to turn ideas into products. America has a bigger and more adventurous investment capital market than we do. Bank finance also plays its part and the evidence is that US banks have rebuilt their balance sheets rather more quickly than British banks – and commercial lending is now beginning to expand. In Britain and Europe, however, it is stagnant.
Fifth, America’s housing market, although it fell a lot further than Britain’s, is now recovering with house sales and new builds moving up, providing a welcome boost to construction. Although the coalition is promising help to housebuilders, and support for first-time buyers, it is hard to see that making more than a modest improvement.
Six, the deal on the tax side of the US fiscal cliff equation has cleared a lot of uncertainty. Investors seem to have concluded that although there is still the matter of spending cuts to be sorted out by the end of February, a deal on that is more likely than not, providing a boost to stock markets not just in America, but around the world.
All these factors seem to have created a mood of confidence amongst consumers and businesses. It is hard to detect the same upbeat atmosphere on this side of the Atlantic.
And yet, for all that, economic forecasts are for only 2 per cent US growth this year. While the part resolution of the fiscal cliff has yet to be factored into the predictions, it still seems unlikely that US growth will top 2.5 per cent, which is below the level that would provide a significant stimulus to our own economy.
Furthermore, there is one big, and very worrying, difference between the British and American political climate. Where President Obama and Congress have cleared up a lot of uncertainty, Mr Cameron is creating it.
He intends, he said, to negotiate a “new agreement” with the EU to which the British people will be asked to give their consent after the election, assuming he wins it, in 2015. This sounds like the ideal way to put the British economy into the deep freeze until this question is cleared up.
Mr Clegg pointed out that one in ten British jobs depend on free trade with the EU. More jobs should come with the prospective EU-US free trade agreement. But why would any overseas firm, or a big domestic company, make a big investment in Britain when it might be outside the EU trade zone and the EU-US agreement in three years’ time?
Far from promising a bright and energetic future, this mid-term review foreshadows a dull and dark fog.