Sunday, April 11, 2010
Sick man of Europe springs back into life
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

daffs.jpg

Think back just a few weeks to when official figures were released showing that Britain's economy barely scraped out of recession in the final three months of last year.

Not only was the UK late out of recession, it was barely out of it at all. The feeble 0.1% rise reported by the Office for National Statistics (ONS) was an apology of a recovery and, as some economists warned at the time, virtually guaranteed a "double dip" in the first quarter of 2010.

How different things look with the passage of time. The sun has come out and a warm glow is showing through in the recovery evidence.

I said at the time that those provisional fourth-quarter figures looked suspiciously weak and so it has turned out. Now we know that the economy grew by 0.4% (and the figure may be revised higher than that), while the eurozone, which originally also had a 0.1% growth rate in that period, has been revised down to zero.

All that is fairly ancient but important history. What is also increasingly clear, however, is that the first quarter turned out pretty well, despite a terrible, snow-
blighted start in January.

Figures last week showed that industry bounced back strongly in February, with manufacturing up by 1.3% and overall industrial production up 1%. Taking January and February together, both measures are higher than their average in the previous quarter. Something very bad would have had to have happened last month, in other words, not to give a picture of continuing growth over the quarter.

Indeed, the National Institute of Economic and Social Research estimates on the back of these figures that the economy probably grew by 0.4% in the first quarter, exactly in line with the previous three months, despite those weather setbacks.

Chris Williamson, chief economist at Markit, which produces the monthly purchasing managers' surveys for the Chartered Institute of Purchasing and Supply, said his evidence is consistent with growth of 0.5% in the first quarter.

Though growth in the service sector slipped back in March after a very strong February, manufacturing continued to power ahead and construction returned to growth for the first time in two years.

"With an ongoing manufacturing-led recovery in output gathering momentum and becoming increasingly broad-based, spreading to services and construction, the surveys indicate that businesses are beginning to rebuild inventories and raise expenditures on investment," said Williamson.

The Paris-based Organisation for Economic Co-operation and Development, whose assessments have often provided ammunition for critics of Britain's economy, also offered some assurance.

It expects first-quarter growth of 0.5%, picking up to 0.75% in the current quarter, which would be the fastest in the G7 with the exception of Canada.

One feature of the economy as we move through 2010 seems to be that Britain's recovery will easily outstrip that in the eurozone. This is partly due to the advantage of having a competitive pound. But it is also because there was always more to the British economy than the 8% of gross domestic product contributed by financial services. The flexibility that stood Britain in good stead before the crisis will still be an advantage as the economy moves out of it. Policy, particularly monetary policy, has been very supportive.

There is still a chance the ONS will bowl a googly on April 23 and report that GDP did not grow in the first quarter. That, however, would stretch its credibility. Even so, it takes a long time before people and businesses become convinced recovery is taking hold. Particularly in a pre-election period, statistical evidence is easily dismissed as propaganda. This is despite the fact that not only is the ONS independent as it has been demonstrating but so are the other providers of recovery evidence.

This is not remotely political. Though some like to wallow in gloom, we should be pleased the economy is recovering. But we are in that minefield of dodgy statistics and half-truths known as a British election campaign. Did every job created in Britain in the past decade or so go to immigrants?

The labour market is in a state of permanent flux. Every month, hundreds of thousands of people get new jobs, while others retire or are made redundant. Since 1997, when official figures for UK-born and non-UK born employment started, millions of people in both categories have found jobs.

It is the case that in net terms, more new jobs have gone to non-UK people than those born here, as has been known for some time. UK-born employment is up by 1m compared with 1997, from 24.3m to 25.3m, while non-UK born employment has risen by 1.8m, from 1.9m to 3.7m. So about two-thirds of net new jobs have gone to non-UK born people.

A couple of caveats are, however, essential. The first is that, even after the recession, the working-age employment rate for people born in the UK, 73.5%, is both higher than it was when the series began in 1997, 73.1%, but also higher than the 67% rate for people born outside the UK.

The other is that an essential counterpart to foreigners working in Britain is the fact that millions born in the UK work in other countries. There are no official figures for this but we know that of the hundreds of thousands who emigrate every year, a high proportion do so for work reasons. This is not to deny that some people have legitimate concerns about the pace of immigration in recent years. But let's have the full picture.

PS: A reasonable rule of thumb for round-robin letters is that the more signatories there are, the more it is likely to be wrong. Though economists are still arguing about it, the daddy of them all was the March 1981 missive from 364 of them (including the present governor of the Bank of England) warning the Thatcher government's policies would deepen the recession. As things turned out, March 1981 marked the start of the recovery.

The number of business people endorsing the Tory pledge not to introduce most of the planned National Insurance rise has not yet reached 364 but give it time. Hard-headed businessmen, apparently resolute about cutting the budget deficit, turned to jelly when offered the blandishment of avoiding a tax hike. The greater detail on efficiency savings apparently provided on Friday by Sir Peter Gershon, now advising the Tories, failed to resolve any of my doubts.

Let me not tar everyone with the same brush. The Engineering Employers' Federation, which represents manufacturers, gave a model response. "Some employers will be relieved at the Conservative plans to reverse partially the rise in National Insurance," said Steve Radley, its director of policy. "But until they see more detail on how the deficit will be reduced, they will be concerned at what this might mean for future tax rises and potential cuts in critical spending to improve our infrastructure.

"They also remain frustrated that they have heard little or nothing from the main parties about how they will tackle the urgent tasks of reducing the deficit and rebalancing our economy."

That is what business should be saying, rather than jumping on this rickety bandwagon. But there is a silver lining. The next time business leaders pipe up about drastically cutting the deficit, it would be wiser to ignore them. I'll listen to what Sir Stuart Rose says about underpants but not public borrowing.

From The Sunday Times, April 11 2010