Sunday, December 05, 2004
Misty-eyed as the economy sails on to a record
Posted by David Smith at 10:00 AM
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SOMETIMES, listening to Gordon Brown, I get misty eyed. For those of us who have followed the economy through thick and thin — often very thin — this is a vintage period.

An economy that we came to regard as both accident-prone and inflation-prone, capable of being blown over by the merest breeze, is, he reminded us, enjoying “the longest period of uninterrupted growth in the industrial history of our country”.

An exciting moment, indeed, is looming. In less than four weeks, at the end of December, the economy will have achieved 50 successive quarters of continual growth. That has not happened before — ever.

What happened before when oil prices jumped? Britain suffered from a combination of high inflation and recession — stagflation. What happened this time when oil hit $50 a barrel? The growth goes on, but inflation is just 1.2%.

Even if you are suspicious of that consumer-prices measure, the “headline” rate of retail price inflation is only 3.3%, a far cry from the 26%, 22% and 11% rates at the time of the previous three oil-price spikes.

Our labour market, meanwhile, is in danger of becoming the envy of the world in at least one respect. Mindful of the charge that Britain does well in relation to sclerotic Europe but badly when compared with other Anglo-Saxon economies, Brown produced surprising numbers. In Britain, 75% of working-age adults are in employment, which is higher than America’s 71%, Japan’s 69%, Germany’s 65% and France’s 63%. For Britain to have a higher employment rate than America is staggering.

And just in case anybody has forgotten how it used to be, Brown made some useful comparisons. Since 1997, the base rate has averaged 5.3%, almost half its 10.4% average over the 1979-97 period. Many will say this has nothing to do with the chancellor and everything to do with the Bank of England. He did, however, have the foresight, and the political courage, to give the Bank its independence. Had the Tories done this after the 1992 exchange-rate-mechanism fiasco, they would have been on much firmer ground now.

The effect of a Brown set-piece speech is strangely reassuring. The chancellor is one of nature’s bustlers but on these occasions a kind of serenity takes over. As he sails on like a galleon, short-term worries seem to disappear in his wake.

Take the housing market, the current obsession. Brown said “the expected moderation in house price inflation” will lead to slower growth in consumer spending. But talk of a crash seems alien to him. A section in the pre-budget report document makes a case for permanently higher house prices.

The conventional valuation measure, the ratio of house prices to average earnings, can be “highly misleading”, the Treasury said. The ratio itself appears to be on an upward trend and the limited supply of new housing argues for prices outstripping the growth in incomes. The report’s overall conclusion is that houses are not much overvalued and that in the current stable economic environment they can adjust gradually and painlessly. The words “soft landing” do not appear in Treasury documents, but that is what it has in mind.

What about Brown’s overoptimistic forecasts for growth next year? What about the black hole? And what about the fact that, through regulation, red tape and higher taxes, he is progressively shackling the economy and rendering it uncompetitive?

On growth, there are two issues. The first is that the arithmetic for achieving 3%-3.5% growth in 2005 is more testing than this year, because the economy has weakened throughout the year. But data revisions have come to the chancellor’s rescue before. And the Treasury is not wildly adrift from the independent consensus for growth of 2.6%. When the economy does go wrong, it will be by a bigger margin than that.

Another issue is about whether Brown’s growth, if achieved, will condemn us to higher interest rates. The Treasury does not think so, because it thinks there is still spare capacity to be used up. The Bank may disagree, although it concedes there is a lot of uncertainty about the relationship between growth, inflation and spare capacity.

There is a bigger issue, potentially, in the black hole. Brown has left himself an £8 billion margin of error to meet his golden rule of balancing the current budget over the cycle. In public-finance terms that is small change.

If the Treasury is wrong about the recovery in tax receipts it is predicting for the coming months, we may know the rule has been broken before the May general election. But while that would be a huge embarrassment for the chancellor, it is hard to argue that it is of great economic significance.

Much more important is the question of whether Brown, for all his ambitions of creating an economy capable of competing with India and China in 2015, is doing the opposite through taxation, the often wasteful growth in public spending and red tape.

That is the risk, though it has to be said that recent figures for private-sector productivity growth are impressive and record levels of employment (only partly explained by the public sector) hardly suggest that the re-regulation of the labour market is having a devastating effect on jobs. It may all end in tears, but there is no sign of that yet. In the meantime, let’s enjoy the vintage.

PS: The past few days have not been good for ultra-optimists on interest rates. Nationwide building society said house prices were still rising — up 1% last month (though Halifax’s index was down 0.4%). The CBI said November was not as bad for retailers as anecdotes suggested. And the purchasing managers’ index reported signs of life in manufacturing. On top of that, the Organisation for Economic Co-operation and Development said rates may hit 5.5% or 5.75% next year, and Mervyn King, Bank of England governor, said the economy was strengthening.

What to make of it? The Nationwide figures were consistent — just — with a continued slowdown in the housing market and were accompanied by a forecast of only a 2% rise in prices next year. There is the intriguing possibility that prospective buyers may have been cheered by the belief that interest rates have peaked (a mood the OECD will have helped puncture). It is also the case that when mortgage lenders like Nationwide have got the market wrong in recent years, they have erred on the low side. Nationwide predicted a 9% rise for this year but the result will be closer to 14%.

Even so, its new forecast of flat prices looks plausible and matches my view. I will be debating the soft landing with arch-bear Roger Bootle this week and will report back.

As for the OECD, its view seems wrong on a few counts. Even if the economy is close to capacity, as it said, there is no sign this is generating inflation. The most plausible view is that the base rate will stay at 4.75% for a long time.

Finally, my request last week for irritating jargon has gone down splendidly. My thanks to John-Paul Crutchley of Merrill Lynch for an inadvertent contribution, a new research report entitled Northern Rock — Walking the Walk as well as Talking the Talk. But mainly I have to thank the many readers for their examples. Don’t stop now; this could be the best ever. I can promise, before Christmas, a real treat: not only the best examples of irritating jargon but something that will double up as a business tool.

From The Sunday Times, December 5 2004