Sunday, July 15, 2007
60 quarters and counting - but for how much longer?
Posted by David Smith at 09:00 AM
Category: David Smith's other articles


This Friday, Britain’s economy will pass a significant milestone. Unless something odd has happened, the Office for National Statistics will announce that the 60th consecutive quarter of growth has been chalked up.

These things are never certain until the ink is dry on the press release, but the National Institute of Economic and Social Research says the economy’s 60th quarter of growth, April-June, will have been 0.7%. Lehman Brothers is even more upbeat, expecting 0.9%.

Put like that, it sounds rather bald and unexciting. So how can I impress on you the magnitude of this achievement? Well, how about that the previous record run was 19 quarters, from 1985 to 1990. Or that a long run in the “golden age” of the 1950s and 1960s was six or seven quarters, and four or five was more typical, such was the stop-go nature of economic policy.

So 60 consecutive quarters is a bit like Roger Federer winning Wimbledon for another 10 years.

The last time the economy stumbled was 15 years ago. We were all a lot younger and some weren’t even a twinkle in their parents’ eyes; there are 12m children alive in Britain today who have never experienced anything other than a rising economy.

Just to put it further into perspective, the last time Britain had a quarter of declining GDP, George Bush Sr was US president, John Major unexpectedly won the April 1992 election and the IRA blew up the Baltic Exchange in the City.

So something special has happened. Measured by gross domestic product, and inflation, Britain has been more stable over the past 15 years than at any other time in the modern era.

The flexibility established in the 1980s and the much-improved macroeconomic policies of the 1990s and onwards – inflation targeting – have combined with a generally favourable global economic environment.

Economics would not be the dismal science it is, however, if we did not look for clouds rather than silver linings. It would be nice to think that this long upturn will last for ever but, sooner or later, there will be a downturn. So when will it all come to an end, and how?

It is hard for Britain’s economy to get into trouble in the absence of a global recession. As the late Christopher Dow put it in his study of 20th-century recessions: “In general, other countries had recessions at about the same time as the UK, though the precise timing differed.”

One feature of recent years has been that Britain grew through the “perfect storm” of 1998; the Asian, Russia and hedge-fund crises. It also grew during the short-lived global recession of 2001.

What about now? Sub-prime problems in America and fears over collateralised debt obligations (CDOs) have unsettled equity markets and sent the dollar tumbling. Credit markets are suffering extreme turbulence.

The last time the world economy was growing as strongly as this for a sustained period, in the late 1960s and early 1970s, there were similar symptoms of rising commodity prices and worries about global food shortages. Then the corrective was provided by the 1970s’ stagflation.

Barton Biggs, the Wall Street strategist turned hedge-fund manager, writes in Newsweek that he sees parallels between now and just before the October 1987 stock-market crash. That crash did not directly lead to a global downturn, but the interest-rate cuts it forced on central banks allowed inflation to take hold, the response to which produced the recession of the early 1990s.

What is difficult in a situation like this is distinguishing between the normal strains of a rapidly-growing world economy – a global economic picture we should celebrate – and forces that could bring it to a juddering halt.

Jim O’Neill of Goldman Sachs, in a research note usefully entitled What Would the Next Recession Look Like?, starts from a position of celebration. He remains upbeat about the global economy through next year which, he says, will mean “2003-2008 will have been one of the most powerful periods of economic growth globally since accurate data has been collectable for much of the world”.

He is also optimistic about the US economy. Even if housing woes spread, they are unlikely to lead to recession, and if there is a danger of it, inflation is well enough under control to allow the Federal Reserve to cut rates in response.

China’s emergence is a huge influence on the global economy, and an important reason why it is now firing on all cylinders. And China, O’Neill suggests, is where we should look for clues on the next global downturn. Much about China is unprecedented, not least the fact that it now has a current-account surplus of close to 10% of gross domestic product. That could trigger protectionism, particularly in Washington, or indicate that China’s growth is unsustainable.

“The next true recession would almost certainly involve a major economic slowdown in China,” O’Neill says. But we’re not there yet, and may not be for some time.

What about spontaneous combustion in Britain, under the weight of household debt and high house prices? Unkind souls might say Gordon Brown’s emphasis on housing affordability could be the trigger for a house-price crash. But he’s been saying this for a long time and the arguments on house prices are familiar ones. The market is slowing, as the Royal Institution of Chartered Surveyors showed last week, but is still a long way from collapsing.

The outlook is, however, for significantly weaker economic growth. Consumer spending will be hit by the rate rises we have seen, and that hit will be at its most intense during autumn and winter. Stuart Rose, Marks & Spencer’s chief executive, put a brave face on the sales slowdown he announced last week. Despite a surprisingly jaunty British Retail Consortium survey for June, he and other retailers are going to have to get accustomed to being brave.

The consumer slowdown will take us into a period when public spending will also be growing significantly slower, from the spring of 2008 onwards. Having grown at approaching twice the rate of the rest of the economy in recent years, public spending will have to make do with 2% annual growth in future.

A slowdown at home, is of course, what the Bank of England is aiming to achieve. When the world economy was weak, just after the start of the new millennium, the Bank was glad to boost domestic demand through interest-rate cuts to compensate.

Now, we are in the opposite situation. As things stand, its actions, combined with the public-spending slowdown, are likely to brake rather than stop Britain’s record expansion. Sometimes, however, you have to be careful what you wish for.

PS The most interesting ideas on tax are not coming from the government, or the Conservatives, but the Liberal Democrats. Some would say that is the luxury of permanent opposition, though there are circumstances in which the party could be part of government after the next election. LibDem tax proposals have a habit of finding their way into Labour budgets, as with the party’s earlier plan to abolish the 10p starting rate of tax and cut the basic rate by 2p.

The latest plan, launched last week, envisages cutting the basic rate from 20p (the level it will drop to in April next year) to just 16p. Add back local income tax, averaging 3.5p, and the overall income rate edged back up close to 20p, but with the important proviso that council tax will have disappeared.

There is something Lawsonian about some LibDem ideas; reducing tax reliefs to cut tax rates. Some of its proposals, to limit pension tax relief to the basic rate and get rid of capital-gains-tax taper relief, will have adverse consequences.

But the LibDems appear to be in tune with the zeitgeist when they propose taxing the better off more heavily. They point out that the bottom 20% of taxpayers pay more in tax, 36.4% of income, than the 35.5% paid by the top 20%. For a long time now, people have got used to the idea that relatively low taxes for high earners were a good thing because they sharpened incentives and attracted talent to Britain. The low taxes paid by some in the private-equity business have changed that. They have a lot to answer for.

From The Sunday Times, July 15 2007