Today we get the latest nasty warnings, namely that Europe is about to be hit with the latest ‘nasty’, namely massive credit-card defaults, which will hit Britain (as the largest user) disproportionately hard. [That ‘green shoot’ looks suspiciously like red ink to me!) . The IMF thinks this will impact severely on potential recovery
Bootle’s article ranges over the whole field but strikes me as being dangerously optimistic.
Christina
TELEGRAPH 27.7.09
1.Recovery could catch a cold from swine flu - or a range of other nasties
Are we on the way out of recession or still stuck in it? Economists have been falling over themselves to be the first to call the recovery, but it is beginning to look as though they are too early. [It's been clear for a long-time that the green shoots brigade are either standing to make a killing from 'talking-up' the economy or that they are like Lillywhite - "not-too=bright' -cs]
By Roger Bootle
Admittedly, over the last few months, there have been quite a few favourable indicators. Retail spending has remained resilient. Last week's official retail sales figures for June showed that sales volumes rose by 1.2pc. Consumer confidence has also been rising. Last month, the GfK composite index rose to its highest level since April 2008. Expectations for the general economic situation over the next year rose to their highest for four years.
Meanwhile, it looks as though house prices may have stabilised – at least for now. The Nationwide index of house prices rose by 0.9pc in June, following a 1.3pc rise in May. Equity markets have also rallied. Over the past two weeks, the FTSE 100 has risen by 9pc and the American S&P 500 has risen by 11pc.
But it isn't all sweetness and light. Far from it. Friday's surprisingly weak provisional GDP figures for the second quarter provided a powerful counterweight. Output fell by 0.8pc on the previous quarter and by 5.6pc over the year. This was the fifth consecutive quarterly fall in GDP and took the cumulative drop in output so far to 5.7pc, broadly equivalent to the total drop seen during the recession in the early 1980s. If output stagnated over the rest of this year, then this year's GDP would be down on last year by 4.7pc ? far worse than most forecasters had expected.
And it could well stagnate or worse. The recovery in the services sector appears to have stalled. The headline business index of the CIPS/Markit Survey on services fell marginally in June, the first fall in seven months. And not only did manufacturing output fall by 0.5pc in May, but April's rise was revised away. The level of manufacturing output has fallen back to its lowest level since 1992.
Also on the downside, in the three months to May, the ILO measure of unemployment posted its biggest quarterly increase on record, of 281,000. If unemployment continues to rise like this, it will have a major effect on the housing market, causing house prices to fall back again, just as happened in the 1990s housing downturn.
Corporate results have given a mixed picture, but last week's figures from Microsoft, surely a bellwether of the modern economy, were decidedly bearish.
Moreover, the banking system remains weak. Despite all the money pumped into the banks and the exhortations to lend, the latest data show the annual growth in bank lending to firms and households slowing to 2.2pc.
Abroad, there are some signs of improvement in the US economy. In particular, the ISM manufacturing index is now at a level suggesting that the recession has ended, and the housing market appears to have stabilised. And the Conference Board Leading Indicators Index rebounded into positive territory in the second quarter. In the eurozone, however, the signs of a recovery have been weaker. Both the manufacturing and services PMI indices remain below the 50 "no-change" level that separates expansion from contraction.
In fact, I suspect that both here and abroad, economic indicators will undergo a roller-coaster ride lasting several quarters. Accordingly, in order to form a view of the future, rather than extrapolating the latest bit of economic data, I think it is wise to focus on structural factors which will determine the shape and pace of the recovery. The really important question is not so much when a recovery will start as how strong it will be when it comes.
There are some considerable threats yet to be faced. The risk that swine flu will have a major impact on the UK economy seems to be growing. Workplace absence looks set to rise significantly. The worst-case government scenario is that 30pc of the population become infected. If each swine flu victim takes two weeks off work, then a quick back-of-the-envelope calculation suggests that total working hours would be 1pc lower during the year than would otherwise have been the case.
Moreover, we need to be alive to the influence of policy. After all, the authorities made major policy mistakes during the American depression of the 1930s and during Japan's attempt to stage a repeat in the 1990s. There are already starting to be some concerns over monetary policy.
Talk has shifted to how and when policy will be tightened again. Although it is important for the MPC to have a clear exit strategy from its exceptionally loose policy, there is a risk that the committee actually pursues it too soon, snuffing out the economic recovery and raising the risk of prolonged deflation.
Even if this is not what it does in the end, the talk about it now risks damaging confidence and holding back recovery. The Bank could take a leaf out of the Fed's book and declare that it expects to continue with its current policy of near-zero interest rates for an extended period.
The biggest risks, though, lie with fiscal policy. Confidence has stabilised, but that is partly because an enormous burden has been passed to the public sector. The Government's deficit will this year be £200bn. Next year, it is unlikely to be much lower.
This cannot go on. We are on course to hit a debt to GDP ratio of 100pc in a few years. There are risks from doing nothing and there are risks from doing too much. Fiscal policy is already set to be tightened following the coming general election.
The full withdrawal of personal allowances for those with income above £100,000 and the introduction of a 50pc rate of income tax on earnings above £150,000 will both come into effect next April. And the rate of National Insurance contributions will rise by 0.5pc in April 2011 for both employees and employers. But these measures could be only the tip of the iceberg. Whether there is a further significant rise in taxes or not, there is surely going to be a very sharp squeeze on public spending – whoever is in power.
One way or another, the contribution of the public sector to the growth of demand is going to fall back sharply. What's more, it will have to stay down for several years. Accordingly, it isn't enough for an economic recovery to be starting. It will have to be strong enough to overcome the headwind blowing out of the public sector. I doubt that it will be.
That's why I continue to be cautious about the likely pace of recovery – whenever it finally arrives.
------------------------------------------------------------------------
Roger Bootle is managing director of Capital Economics and economic adviser to Deloitte
Posts
