Sunday, April 22, 2018
Reasons to be cheerful as the rest of the world blooms
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.

I return at a time of good news about the world economy. Despite worries about rising trade tensions, and a slight softening of economic activity surveys since the start of the year, optimism persists.

The International Monetary Fund, holding its spring meetings in Washington, has stuck to its January forecasts for global growth of 3.9% this year and next, in line with the average for the 2000s and thus similar to pre-crisis norms. The world economy, which grew by 3.8% last year, appears to have settled into a run of stronger growth.

Oxford Economics concurs, noting that despite weaker numbers in some countries, world growth is “still running at a solid pace” and set to continue.

The IMF is concerned about trade tensions, though its chief economist Maurice Obstfeld described what we were seeing so far as mainly a “phoney war”, with only warning shots fired. It is also concerned that, because of rising debt since the crisis, countries will not have the ammunition to fight the next downturn.

That is for later. For now, however, things look set fair, particularly in the so-called advanced economies. Not so long ago they were struggling, dragged down by the eurozone recession and sluggish growth in America. In 2012 and 2103, advanced-economy growth was just over 1% a year. Now it is 2.5%, boosted by an expected recovery in eurozone growth to 2.4% this year, and in US growth to an impressive 2.9%. Donald Trump will not achieve his promise of doubling US growth from its post-crisis average of 2% but he has helped shift it significantly in the right direction.

It is at a price – America is the only advanced economy projected by the IMF to see a rise in its debt to gross domestic product (GDP) ratio over the next five years – but he would no doubt say that is a price worth paying.

This matters a lot for Britain. When the world economy is strong, it is hard for anything really bad to happen to an open economy like ours. Growth has weakened – the latest four-quarter growth rate of 1.4% for gross domestic product (GDP) was less than half of its rate three years’ earlier even as the world economy has strengthened – but it would have weakened a lot more if not for the upside surprise on global growth.

That upside surprise is reflected, though sadly not yet by enough, in a stronger performance for exports of goods. On the most flattering measure, excluding oil and erratic items, export volumes in the latest three months were up by 4.2% on a year earlier.

Exports of services are also doing well. They are rising at a 7% annual rate in value terms, and were boosted by a very strong rise in exports to the rest of the EU last year.

Britain is missing out on the global boom because of what Christine Lagarde, the IMF managing director, described as the “cloud of uncertainty” hanging over the economy. It predicts growth of 1.6% this year and 1.5% next. The EY Item Club’s new forecasts to be published this week are a touch stronger – 1.6% and 1.7% respectively – but not by much.

Most people do not, however, obsess about the GDP numbers; many do not know what they are. They do care about unemployment and about whether their incomes are outpacing inflation.

The level of unemployment, at just over 1.4m, is similar to what it was last summer but thanks to a rising working-age population, the rate has dipped to 4.2%, a new low since 1975. That is good news, and better than anybody expected. Though there is a lot of talk of job insecurity, the job market overall looks secure for the moment.

And, while nobody will be putting any bunting up, the fact that wage growth, 2.8%, has moved fractionally above inflation, 2.7% in the relevant month for the comparison and 2.5% now, is also good news, and better than the alternative of falling real wages.

It will take time before this reduces the difficulties affecting retailers, though over time it will. The downturn that has brought a string of high street casualties was reflected in the official figures, which showed a 0.5% drop in retail sales volumes in the first quarter. The figures were dragged down by weak, snow-affected petrol sales last month, though the snow also boosted online spending, but sales were subdued even before the bad weather hit.

The other reason for optimism, as we embark on the next stage of Brexit negotiations, is that despite her difficulties on other fronts, the prime minister is pursuing a skilful course in steering us away from the most dangerous and destructive EU exit.

At every stage, through concessions, compromise and blurred red lines, Theresa May has been moving towards what Philip Hammond has described as “the closest possible arrangement” with the EU, with only “modest” divergence from the current situation. The absence of a credible alternative from around the cabinet table, still less from those Tories who would flounce away without a deal, has made that task easier.

This too limits the damage to the economy. Last month’s agreement on a 21-month transition period, while still dependent on other aspects of the negotiation, has made businesses notably less nervous about Brexit. The latest Deloitte survey of finance directors, conducted since last month’s EU summit, showed that Brexit was no longer their chief concern, though weak growth was.

Meanwhile, following last week’s House of Lords vote in favour of Britain staying in a customs union with the EU, and this week’s expected knife-edge Commons vote on the same issue, the government’s position may also be evolving.

Though staying in a customs union (it would have to be a new one) would ruffle some Tory feathers, few voters would go to the stake on the issue. Polling suggests that voters are broadly in favour and unmoved by the constraints this would impose on Britain’s ability to negotiate bespoke trade deals. It would also have the useful effect of resolving the thorny issue of the Irish border.

Whether it happens remains to be seen, but staying in a customs union is no longer off limits. Some in Brussels think Britain may also eventually decide to stay in the single market though that looks like a much longer shot.

The strength of the global economy and an easing of some of the immediate Brexit uncertainties, because time has been bought, are both good news for Britain’s economy. We can but hope for more of it.