Global Economics

Commentary: Green Shoots or Seeds of Hope?


Yes, there are early signs of economic turnaround in Britain. But rising unemployment means there's plenty more pain still to come

Good news: the Germans may be right. There are straws in the wind that suggest that the economy may indeed improve more rapidly than seemed possible even a few weeks ago. Thus, we may, as Angela Merkel keeps telling us, not actually need such a massive fiscal boost as Gordon Brown and Barack Obama have been campaigning for.

What's the evidence? The most significant is the Bank of England's Credit Conditions Survey, published yesterday. The G20 may have forgotten about this, but all the public spending and tax cuts the authorities throw at the economy will have only a limited impact while the banking system remains dysfunctional. Any suggestion that things are ameliorating in that crucial part of the economy is more than welcome.

Now, over the past year or more the Bank's survey – a piece of qualitative, but valuable research – has been an unremittingly gloomy document. It is not exactly OK! now, but it does, at last, suggest an improvement. The survey says that "credit availability to households and corporates was expected to improve over the next three months, associated with an improvement in the cost and availability of funds".

We have to acknowledge that the Bank also points to a decrease in demand for credit, with households paying off £8bn of mortgage debt in the last quarter of 2008, but at least the money will be there for those who do need it.

The money markets are also easing. This is what Baroness Vadera had in mind when she made her ill-judged remark about "green shoots" in January, but she had a point. While still abnormal by historic standards, measures such as the Libor-OIS spread indicated things are thawing.

We could quite happily dismiss the blip in the Nationwide house price index as a one-off, soon to be reversed in the way the Halifax's freakish increase in February was soon wiped out. However, the evidence on mortgage approvals suggests that a certain amount of bottoming out might be going on. Approvals, at about 36,000 a month, are still some two-thirds off their long-term norms, but it shows that the anecdotal evidence from estate agents about a flutter of buyer interest is a bit more than a vain effort to talk up the market. There is demand out there, fed by a deeply embedded property-owning psychology (desirable or not).

Then there is the evidence from the "real economy" – the surveys conducted by the Chartered Institute of Purchasing and Supply (Cips). These have proved reliable leading indicators of economic activity, and they have at last stopped getting worse. We have had two so far this week, in manufacturing and construction. The construction one is dire, but does contain a seed of hope – namely new orders for private and public infrastructure surging by 149 per cent, evidence of the Government's spending splurge feeding through at last, maybe.

More optimistic news emerges from the Cips manufacturing survey. Here there are some grounds for thinking that the "inventory recession" – retailers selling out of stock and slashing factory orders, also called the "Honda effect" – is wearing off. It could be, as the Bank noted elsewhere, that modern methods of stock control may mean that the traditionally sharp inventory recession of past decades may be executed more quickly today, as software helps managers to balance stocks and sales in a more sophisticated manner.

The Cips manufacturing survey also contained the first glimpse that the near 30 per cent decline in sterling since its 2007 peaks is starting to yield some results for exporters. Imports are already being badly squeezed, so some improvements in the balance of trade, and thus a positive contribution to growth, ought to come through in due course, depressed as global demand and trade still are. (My worry is that the UK has lost so much of its capacity to export, visible in our shrunken manufacturing sector, that it may also constrain recovery, but that is very conjectural.)

The stock market, too, is showing signs of life, with the FTSE 100 index dragging itself over the 4,000 mark, though I hesitate to think of the index as a consistently good omen.

Let us not get carried away, however. All these improvements are from abysmally low bases, and there are many more indicators pointing in the wrong direction. The single biggest indicator of economic decline and obstacle to growth is unemployment, traditionally a lagging indicator and poison to consumer confidence. It will still probably rise to three million plus over the next year, and will be a drag on recovery, as it always is. Yet this lagging indicator may be less lagging than it used to be, thanks to changes in the labour market since the 1970s. Just as unemployment started climbing more quickly than in previous recessions, it is possible that it will drop more steeply once output begins to pick up again.

But the threat of joblessness is a potent one. A basic picture seems to be emerging here, of the British consumer scared of losing their job and their home, and throwing almost everything at paying off the mortgage. An excellent plan for the long-term rebalancing of the UK economy and for the personal financial security of the individuals concerned, but a classic case of the paradox of thrift. It will undoubtedly dampen domestic spending and output.

So it is difficult to contradict the IMF and the OECD: this year will still in all likelihood go down as the worst calendar year for the economy since 1931, so no cause for celebration there; but next year (election year, let us remember) may well see more of a bounce than anticipated.

Uncharacteristically, the Governor of the Bank of England, Mervyn King, let slip to the Treasury Select Committee during his evidence last week – the session where he told Gordon Brown not to borrow even more money – that he thought the rest of the boost to the economy from the authorities would begin to see results in about six months' time. And that boost is truly formidable – interest rates slashed from 5 per cent to 0.5 per cent; £75bn plus of quantitative easing; a £20bn fiscal boost in the pre-Budget report, on top of already huge borrowings; the recapitalisation of the banks; important lending agreements with semi-nationalised and nationalised banks; and selective measures such as the £10bn loan-guarantee scheme run by the Department for Business for small and medium-sized enterprises.

Green shoots? A dangerous phrase. The original author, John Major's unlucky chancellor Norman Lamont, protests still that he meant only "shoots, not bushes", and that in any case the quarter after his remarks in 1991 the economy stabilised. I wouldn't claim that we are there yet. But there are seeds of hope. We shall see if they can germinate in this exceptionally chilly economic climate.


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