Over the past few weeks, there has been much talk of "green shoots", even of the recession having come to an end. But while recent evidence suggests that things around the world may indeed be getting better, there is plenty of cause for caution. This was precisely the message contained in two excellent speeches given last week by my former colleagues on the Bank of England's Monetary Policy Committee (MPC). Paul Fisher, the bank's expert on markets, warned that if the banking sector cannot lend enough, it will restrain economic growth – and any recovery – significantly, causing households to save more and spend less. He argued that the domestic and global economies remain vulnerable to further shocks, especially given the low levels of consumer and business confidence. Of course, there have been less cautious voices. The National Institute of Economic and Social Research (NIESR) has even suggested that the recession is over. Mind you, less than a year ago, it was predicting that the UK economy would "escape recession", forecasting positive economic growth in both 2008 and 2009. It got it wrong then and there is no reason to believe it has got it right now. Across the economic indicators, the signs are grim. If the recovery really had arrived, we would be expecting a significant increase in inflation, which goes hand-in-hand with an expanding economy. But while the MPC will inevitably have to write a letter of explanation to the Chancellor this autumn, it will not be because inflation has breached the 2 per cent target The bank's May inflation report forecast that the measure it targets – the Consumer Price Index – would fall short, despite interest rates being at 0.5 per cent and the Bank's spending at least £125 billion on quantitative easing. Inflation will continue to fall and may well go negative by the end of the year. Such deflation has an especially harmful effect on borrowers, since it pushes up the price of debt in comparison to the cost of living. Then there is unemployment. Since January, the labour market has worsened markedly. People do not seem to understand that joblessness is going to rise significantly, and soon. The latest statistics on the state of the labour market, published on Wednesday, show that unemployment has increased to 7.2 per cent, the highest since July 1997. Admittedly, this was less than most commentators expected, but the job total still fell by 100,000 in March, following 37,000 in February, and there has been a big increase in the number of people who have had to take part-time jobs because they can't find full-time work. If world economic conditions continue to deteriorate, unemployment could climb towards four million. Why is this happening? The main reason is that firms have stopped hiring. Of particular concern is that there are now nearly 890,000 people under the age of 25 who are unemployed. That will rise to more than a million, as the class of 2009 graduates from schools, colleges and universities – a tragedy for the nation. And there is more bad news. The Office for National Statistics reported last week that the construction sector (which accounts for about 6 per cent of economic output) saw its sharpest fall for 45 years. This means that the UK economy shrank much faster at the beginning of the year than previously thought, and could knock 0.3 per cent off overall GDP – bringing our first quarterly decline of more than 2 per cent in 30 years. The news from the housing market is also bad. The Bank of England made clear in its quarterly bulletin this week that more than a million households are in negative equity, and that number is set to rise significantly. An analysis based on the ratio of house prices to earnings suggests that house prices still have a long way to drop – probably another 15 per cent or so. That combination of increasing unemployment and further rises in negative equity is worrying, not least for the banks holding the mortgages. It also remains uncertain whether the banking system can lend enough to fuel the recovery, especially when many institutions have withdrawn from the market. In other words, we are faced with a toxic cocktail: sliding house prices, rising negative equity, inadequate levels of credit; soaring unemployment and zero, or even negative, wage growth. In such circumstances, it is almost academic to try to pinpoint whether economic growth is returning. The simple fact remains that we have yet to realise just how painful the coming years are likely to be. Green shoots? I think not. David Blanchflower is the Bruce V Rauner Professor of Economics at Dartmouth College, USA, and served on the Bank of England's Monetary Policy Committee until earlier this year. Thailand's exports slumped by more than a quarter in May - a record fall - as demand for Thai goods overseas continued to drop during the downturn. Exports fell by 26.6% compared with a year earlier, to $11.7bn (£7.1bn). Imports dropped by 34.7% to $9.3bn. "Exports to key markets were all lower due to weak demand and intensifying competition," the government said. The Thai economy, which is suffering from its worst recession in decades, is heavily dependent on exports. And analysts believe the country's exporters, which account for more than 60% of Thailand's entire economic activity, will continue to suffer. "It is less likely there will be a strong rebound in Thai exports in the near future as demand for imports of raw materials has not picked up yet," said Suara Wilaipich at Standard Chartered Bank. The Asian economy has been hit hard by the global economic downturn but also by political unrest at the end of 2008. Green shoots? Strictly for the colour-blind
Talk of economic recovery is simply not backed up by the facts, says David Blanchflower.
but because it has dropped below 1 per cent.
Sunday 21 June 2009
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