Sunday, October 28, 2012
Good news starts to blow away the gloom
Posted by David Smith at 09:00 AM
Category: David Smith's other articles


My regular column is available to subscribers on This is an excerpt.

With David Cameron’s too broad hint of good news on the way to Labour’s obvious disappointment at a better-than-expected figure, the GDP numbers have become a political football as well as the nearest thing the Office for National Statistics has to a sexy announcement.

It would be inconsistent of me not to say these preliminary figures are prone to revision. When they are unexpectedly weak, as in the second quarter, the expectation is that they will be revised up, as they were.

Given the 1% third quarter rise in GDP exceeded expectations, the risk this time is on the downside, though the ONS does not appear to have made unrealistic assumptions for what it does not know about the third quarter (most of September) and the story the figures tell is quite a logical one.

So, taking the second quarter’s 0.4% fall and the third quarter’s 1% rise together, you have a 0.6% GDP rise over six months. Part of that, 0.2%, was the ONS’s treatment of Olympic ticket sales. The remaining 0.4% splits into 0.2% underlying growth in each of the two quarters, which does not look to be stretching things too much.

In the fullness of time, of course, there will be many further revisions to the numbers. I would expect the double-dip from which we have just emerged to be exposed as phony, revised to become more consistent with far stronger job numbers. But we may have to wait years for that.

Even on the figures we have, the economy is not as weak as we thought. Since turning in mid-2009, overall GDP has risen by 3.3%, and is less than 3% below its pre-crisis level. Excluding the depressed North Sea sector, the economy is up 4.4% from its 2009 lows.

The big question, following on from last week, is whether the economy can maintain momentum after this 1% boost.

The problem for the economy so far is that it has been one damned thing after another. The coalition’s deficit-reduction strategy has coincided with a deepening of the eurozone crisis, an economy starved of credit in spite of the lowest interest rates in the Bank of England’s history and high, mainly commodity-driven, inflation.

Of these three brakes on recovery, the inflation news has been better. Even if a rise in food and energy prices pushes it a little higher over the winter, we should not get back to the 5%-plus levels of a year ago.

Oil prices have fallen from their highs, with US crude down 14%. Real incomes should pick up, maintaining the incipient recovery in consumer spending.

The eurozone crisis, in contrast, looks as though it will always be with us. Though the European Central Bank’s announcement of so-called outright monetary transactions - buying the bonds of troubled eurozone members - has removed the air of crisis, European economic numbers took a turn for the worst last week.

Following weak German surveys, the Ifo index and purchasing managers’ survey, it looks as if Germany, one of the strongest economies post-crisis, may go back into recession over the winter. Britain’s recovery is getting no help from Europe.

On the other side of the world, Japan may also be slipping into recession, partly because of a slump in exports to China due to tension between the two countries over the disputed Senkaku/Diaoyu islands.

We have to assume politicians in Washington are not stupid enough to allow the “fiscal cliff” of big emergency tax hikes and spending cuts to kick in, but the uncertainty is affecting US business sentiment.

It is not all bad news out there. China appears to be past its cyclical low. There is growth in the world economy, particularly the emerging world, the trouble being that not enough of it is close to these shores.

So can we build on the third quarter improvement? A positive sign that does not always get attention is highlighted by Simon Ward, an economist with Henderson Global Investors. Ward, who follows the monetary data closely, saw the third quarter GDP bounce as consistent with a rise in the real (inflation-adjusted) money supply. Encouragingly, he says: “With monetary trends improving further in recent months, this upswing should be sustained at least through next spring.”

Does that argue for more quantitative easing(QE) from the Bank to boost the money supply? The markets have concluded that the stronger GDP figure will mean the monetary policy committee will not do more QE next month.

I think that’s right. The veteran City economist Stephen Lewis of Monument Securities, in an elegantly written critique of his old classmate Sir Mervyn King’s speech in Cardiff last week, put it well.

“Sir Mervyn has no reason to believe the money the Bank creates through QE is as effective in stoking economic activity as the money that would have been generated through the extension of bank credit if the banks had been willing to lend,” he wrote. “Most likely it is less effective,”

After five years of inactivity, and over three years of QE, the Bank and Treasury are trying to get credit flowing through the £80 billion Funding for Lending Scheme, intended to get loans to small and medium-sized firms and mortgage borrowers by offering banks and building societies low cost funding linked to lending.

Two things, however, troubled me about the Bank governor’s speech. The first was its gloomy tone. Perhaps we have got used to a governor who talks about the “black cloud of uncertainty” coming our way from Europe, the “slow and unceratin” recovery, or that advanced economies will struggle “to get out of their current predicament”.

Maybe, like the character Mona Lott in the wartime radio comedy It’s That Man Again, it is being so cheerful that keeps him going. Perhaps he is being realistic. But when, to build on the third quarter you need consumers to spend and businesse invest, this is hardly going to do it.

The other was that Funding for Lending Scheme. It is early days – the scheme did not really get going until last month = and the Bank has high hopes for it. But my initial worries it would be another damp squib have not yet been assuaged. I keep coming back to comments by Bank officials when the scheme was floated in the summer, that in its absence there would have been a further lending fall. Maybe just stabilising it will be regarded as a victory.

King, in his speech, talking of Funding for Lending, said that “the window of opportunity which it provides must be used to restore the capital position of the UK banking system.” I thought the idea was to get credit into the economy not build up the banks’ capital buffers.

The authorities, judging by this, may more concerned about having an ultra-safe banking system than one lending enough to maintain the recovery. That is worrying.