Sunday, April 10, 2011
Light of recovery still shining through the gloom
Posted by David Smith at 09:00 AM
Category:

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My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

In recent weeks negotiating conflicting data has been like steering through the mists you get at this time of year. I wouldn’t call it a thick pea-souper of a statistical fog but there are times when it comes close.

Ever since the Office for National Statistics (ONS) surprised us all with that fourth quarter drop in gross domestic product, data watchers in the City have approached each new release with trepidation. They know they are going to get egg on their face, they just can’t be sure how messy it will be.

It happened again last week. Strong industrial surveys had suggested that this part of the economy, at least, was doing very well. But the ONS reported that manufacturing output was merely flat in February and that overall industrial production dropped by 1.2%, hit by North Sea maintenance.

It is tempting to say that this is just a problem with the official statistics but even business surveys are not singing from the same hymn sheet. The monthly purchasing managers' surveys, produced by Markit for the Chartered Institute of Purchasing and Supply, suggested strong overall growth in the economy in March, with service-sector output bouncing back to a 13-month high.

Yet in the same week the British Chambers of Commerce's first quarter survey concluded that the recovery was “mediocre and disappointing” and that the fragility of the recovery was worrying.

Retailers, meanwhile, while prone to moaning about their lot, appear to have good grounds for gloom. Though the picture is not universally downbeat - Marks & Spencer surprised the markets last week with better than expected sales figures - stores are battling against significant headwinds.

The spring weather will help, as will the royal wedding, but consumer confidence has been very weak since January's Vat hike. Ed Balls, the shadow chancellor, had a cheek to attack the government for families’ Black Wednesday, since the biggest element of it was the 1% rise in National Insurance bequeathed by Labour. It, and more particularly high inflation, has squeezed household incomes.

That is the way it is likely to be. If you have a recovery in which the economy is being rebalanced away from consumer spending, weaker consumer numbers are only to be expected.

Confusion in the data is matched by other confusion. A myth is in danger of becoming accepted wisdom about household debt. The Office for Budget Responsibility (OBR) significantly revised up its debt projections last November, compared with those of the previous summer.

This was reported last weekend as something that happened in this year’s budget, because the OBR apparently thought cash-strapped households would be forced to borrow to see themselves through the squeeze.

It was nothing of the sort. Forgive the acronyms but we have had two OBRs, the interim one under Sir Alan Budd, you might call OBR1, and the permanent one under Robert Chote, OBR2. OBR2 looked at the debt projections left by OBR1 and decided they were not consident with the upturn in share prices, housing transactions and prices and pension contributions it expects between now and 2015.

There is also an enormous amount of nonsense about fiscal policy. The myth here is that only huge Keynesian fiscal stimuluses hauled us out of the Great Depression and that countries who are cutting their deficit face similar depressions.

As a version of history, it ignores pretty well everything we have learned in recent years about the depression. Ben Bernanke, the Federal Reserve chairman, its most illustrious student, acknowledged before Milton Friedman’s death that his explanation, that it was the collapse of the banking system and the money supply that did it.

That is why preventing banking collapse and using unconventional means such as quantitative easing to boost the money supply were the essential policy tools this time. Britain, of course, had no Keynesian stimulus during the 1930s but enjoyed good growth, though it was lopsided in favour of the new consumer industries of the south and midlands; protectionism hurting the old industries of the north.

So what is really happening? The first key point is that the global economy is doing very well, despite high oil prices, eurozone sovereign debt woes and the earthquake and tsunami in Japan.

World trade has bounced back strongly from its post-crisis slump and is now at record levels. Given the dangers of protectionism a couple of years ago, that is a hugely encouraging outcome.

Global economic growth is gathering momentum, according to the interim assessment published a few days ago by the Organisation for Economic Co-operation and Development. Even in advanced economies, suffering banking and fiscal hangovers “the underlying momentum in economic growth in most countries appears stronger than in earlier projections,” the OECD said.

Britain does well when the world economy is strong, so that is encouraging. But how well? I have always said that the period of greatest risk was in the first half of this year, with the biggest tax increases (Vat in January and NI this month) and the onset of the serious cuts in departmental public spending.

We will not know until April 27, and the ONS has a habit of throwing a spanner in the works. The range of forecasts for the first quarter is wide, 0.2% to 0.8%, and don't be surprised if the outturn is outside that range. The current quarter, with no benefit from a recovery from snow effects, could be harder and the OECD expects only a 0.2% or 0.3% rise, giving way to something stronger in the second half. It is slow, and occasionally it is unsteady, but it is a recovery.