Sunday, January 29, 2012
Small dip in GDP equals a big drop in confidence
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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

In all likelihood, the 0.2% fall in GDP announced by the Office for National Statistics (ONS) last week will be revised away in time. There were, as there always are, some special factors.

The second mildest autumn in more than 350 years produced a drop of over 4% in gas and electricity output, as well as making it hard for retailers to sell winter woollies and overcoats. A one-day strike by public sector workers on November 30 probably hit GDP, though the official statisticians do not know by how much.

I am not pretending that these were anything but disappointing figures, though there was some relief in the Treasury that they were not even worse. One official recalled what happened a year ago, when everybody was expecting a 0.5% GDP rise for the final quarter of 2010, only for the ONS to report a 0.5% fall. The recovery has been struggling ever since.

The 0.2% fall in fourth-quarter GDP did not change the overall numbers for 2011, which showed 0.9% growth, in line with the late-November projection by the government’s Office for Budget Responsibility. Non-oil GDP, resorting to a distinction that used to be made in the days of booming North Sea output, rose by a slightly stronger 1.4%. The economy has flattened, not dived.

But it was the 0.2% fall that did the damage and, unlike a year ago, there is no automatic reason to expect a bounce in the current quarter. Things are likely to remain flat for a while.

In the headlines and in broadcasts, there is no distinction between a small fall in a flat economy and, say, a 2% drop that would imply a deep recession. People read or hear about the fall, assume the economy is slumping, and their confidence takes another hit.

Another official number last week, showing government debt has topped £1 trillion for the first time, probably has a similar, confidence-sapping effect.

£1 trillion is a big number, equivalent to nearly two-thirds of Britain’s annual GDP, but the milestone did not really mean very much. It was a straightforward consequence of the large budget deficits of recent years.

Underlying it were monthly deficit statistics that are improving at a slightly faster rate than expected.

What about the gloom from the International Monetary Fund, slashing its forecasts for Britain and the world? The IMF has a French managing director, Christine Lagarde, and a French chief economist, Olivier Blanchard.

Though they are right to warn of the dangers of insufficient action by eurozone leaders, there is a danger in seeing everything through a European prism. The IMF looks a little too downbeat on America, predicting growth of just 1.8% this year, and may not have fully picked up on the improved feel recently in other economies.

The global economy did amazingly well in 2010, growing by 5.2%, and not badly in 2011, 3.8%. Even this year, the IMF expects 3.3% growth. It is a slowdown but certainly not a collapse.

It comes to something when you have to look to Sir Mervyn King for reassurance. The Bank of England governor, often criticised for his gloomy tone, reminded us that all crises come to an end.

King’s view on the economy, broadly flat until the middle of the year, before falling inflation eases the squeeze on real incomes and lifts consumer spending off the floor in the second half is one I share.

In the meantime, he said, adjustments are under way in bank, corporate and household balance sheets that will put the economy on “a more sustainable footing than at any point in the past fifteen years”.

Perhaps that is the way we should look at the current situation. Had growth come back quickly and strongly after the worst of the financial crisis, and been sustained, there would have been no need to change.

As it is, the government has belatedly started to introduce supply-side reforms that will bring dividends in the future. They include easing credit constraints on small and medium-sized firms and finding new ways of funding infrastructure.

Though it has been slow off the mark, these reforms, together with the proposed introduction of local or regional pay in the public sector, will have positive effects over the medium or long-term.

But there is much more to be done. The London School of Economics has launched its growth commission, inviting along former US treasury secretary Larry Summers and former monetary policy committee (and current fiscal responsibility committee) member Steve Nickell to do so.

Summers said Britain could not afford to ignore sectors in which it had comparative advantage, notably financial services. Nickell observed that governments had been good at commissioning reports to identify the problems, but less good at acting on them.

Gordon Brown, for example, commissioned McKinsey to report on Britain’s relatively poor productivity performance early in his chancellorship in 1998 but mainly failed to act on the recommendations.

The things identified then, regulatory barriers, low skills, poor management, becoming better at commercialising scientific innovations, remain relevant now. The LSE commission will come up with detailed recommendations

There can never be a magic bullet, or an instant remedy. Looked at with the benefit of hindsight, the despair of the early 1980s turned into a powerful, enterprise-led revival remarkably quickly. At the time it seemed agonisingly slow.

Even so, the questions are being asked now in a way they would not have been. As King suggests, growth disappointment now and the “arduous” recovery may be the process we have to go through to end up healthier in the long run. People and businesses, however, need the confidence to believe in that. At the moment most of them do not.