Sunday, November 07, 2004
We face post-election problems too
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

This has been a week for thinking about elections. George Bush, in gaining re-election, has bequeathed himself a messy economic inheritance to clean up, particularly the budget deficit.

That may mean a post-election economic hangover, and most experts predict slower US growth next year, perhaps even a halving of this year’s 4% growth rate. It means a weaker dollar, both to help correct a current-account deficit running at nearly 6% of GDP, and to provide a stimulus to an economy running out of steam.

The consequences of a further euro rise against the dollar, when Europe is already struggling to grow, hardly bear thinking about. Britain would be reasonably insulated from the currency effect — with the pound probably rising against the dollar but falling against the euro — but not from the effects of slower global growth. The outcome of the presidential election has not changed any of these factors, but it has brought them into sharper focus.

Thoughts have also been turning to elections here. When this newspaper and others reported last weekend that some in the government were urging a February poll, one of the apparent arguments was that it would allow Labour to get re-elected before the economy turns sour.

A feature of the US election was how small a part economics played when set against so-called “moral values”. Bush’s poor jobs record, particularly in manufacturing, failed to clinch it for John Kerry in swing states. The growth performance under Bush, one of the weakest for any modern president, failed to hand any advantage to his opponent.

Normally, Gordon Brown would not want the voting spotlight turned away from the economy. Labour’s economic management has been one of its electoral aces, not least when compared with past Labour governments. But could this be one occasion when Brown would be grateful if the attention was elsewhere? The short-term outlook for the economy is pretty good. It appears to have come through the soft patch I have been commenting on for the past few months. Purchasing managers’ surveys for manufacturing and services, out last week, were upbeat. Shoppers were lured back to the high streets last month by price reductions, according to the CBI, but not the British Retail Consortium.

The housing market is weak, of which more below, but it will be surprising if Mervyn King, the Bank of England governor, does not leave the door open for further rate rises when he presents the Bank’s quarterly inflation report this week. Whether rates actually need to rise — I think not — is another story. Beyond the short-term, however, there are some question marks about the economy, which may figure prominently on voters’ minds here.

Labour’s third-term tax rises, to take a slogan that will be used extensively by the Tories in the coming months, appear to be becoming an inevitability, despite the Treasury’s strong denials. The most recent figures for the public finances, which showed that the budget deficit has not come down at all from last year’s high levels, were interpreted by the Institute for Fiscal Studies and others as a clear sign that the chancellor is on course to break his golden rule.

His aides say the figures will improve during the second half of the tax year, but the Treasury has made such predictions before. If they don’t, post-election tax hikes will be hard to avoid. The golden rule is not meant to be broken.

As for the housing market, the two main surveys, from Nationwide and Halifax, agree prices fell last month, by 0.4% and 1.1% respectively. These falls reflect buying decisions made two or three months ago and, given that subsequent evidence suggests continuing housing weakness, further monthly price drops are likely.

This does not mean we are on the brink of a crash — compared with a year ago prices are up in the high-teens in percentage terms — and my view remains that stagnation is much more likely than collapse. It does mean that house-price inflation is returning rapidly to earth. And it also means that, to the extent that rising house prices have been contributing to a warm feeling of prosperity among Acacia Avenue voters, they will not be in the run-up to the election.

The final area of doubt is the jobs market. On the face of it Labour has nothing to worry about in this regard. Employment has risen by 3m in the past decade and unemployment, less than 3% on the claimant count, meets the economists’ usual definition of full employment.

Increasingly, though, I find that people are unwilling to accept the story of a job-market miracle. Either they believe it is all down to a big increase in public-sector employment, which has indeed made a significant contribution to the growth in jobs over the past two to three years, or they point to other measures that suggest a rather less healthy picture. Of these, the rise in the number of “economically inactive” people of working age, highlighted here before and now numbering nearly 8m, is the most commonly quoted.

There is another measure, which is something of a bee in my bonnet. Before the 1997 election Labour laid into the Tories for the rise in the number of so-called workless households, about 18% of the total. These were households containing people of working age in which no adults were working.

Seven years on and the proportion is a still high 16%, after a period in which the total number of households has grown. More than 3m households are “workless”, and 2.5m of these are economically inactive — in other words the people in them would not be available for work even if it were offered.

In inner London, a third of households with dependent children are workless, and thus reliant on the state. Some, but by no means all, of these are lone-parent households. The government’s welfare-to-work programme, which ministers are given to boasting about, has left huge swathes of the population untouched.

None of this means that Labour will lose the next election. Michael Howard and the Tories can only dream of running Tony Blair as close as John Kerry did Bush. But it does show that everything in the economic garden is far from rosy — and that America is not the only country facing post-election economic problems.

PS: Many is the occasion that I have lauded the economy’s transformation from the dire days of the 1970s, when Britain was the sick man of Europe. Sometimes, though, it doesn’t take much to transport you straight back there.

Travellers arriving back at Gatwick last Sunday morning encountered the kind of industrial disruption more redolent of the winter of discontent than Britain’s modern and flexible economy. A long- running industrial dispute between the baggage-handling contractor Servisair — whose staff were at a loss to explain what was happening — and the Transport & General Workers, a dinosaur union, was apparently to blame.

Not only that, but passengers had to grit their teeth and wait in grim facilities that look as though they haven’t been updated since the 1970s and would only be regarded as quaint by fans of communist-era, eastern European commercial design. In most other places, the airport is seen as a shop window for the country. Not here. As an advert for Britain, Gatwick is about as appealing as your average English football hooligan.

BAA, the privatised firm that runs the airport, announced last week that it made £363m in pre-tax profits in the six months to September 30. All that airport shopping is clearly benefiting somebody, as are those outrageous car-parking fees. Perhaps BAA might think about spending a bit of it on making life better for its long-suffering passengers.

From The Sunday Times, November 7 2004


Liked your columns the last 10 years.
Simple see-- like me.
You base analyses on published stats. Given the crucial importance of inflation indeces, is it any wonder most governments massage them?
But what they have been doing in the USA lately is just fraud!

Posted by: Pat at November 12, 2004 07:16 AM