Sunday, June 09, 2019
As growth stagnates, we yearn for the go-go days of the 80s
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.

Sometimes these days it feels a bit like the 1980s. Younger readers will not know, and older readers need reminding, that back then the toll of jobs being lost, mainly in industry, was sufficient for ITN’s News at Ten, to be able to run a nightly map.

The headlines for manufacturing jobs are bad again. Ford’s announcement of the closure of its engine plant at Bridgend, a town I know, will be devastating for the up to 1,700 people whose jobs are directly affected and the thousands more in the supply chain.

Similar considerations apply to the 4,000 jobs directly at risk at British Steel in Scunthorpe, and the 3,500 that will go with Honda’s closure of its plant in Swindon. In both cases, supply chain job losses will add to the woe.

I would not overdo the comparison. The manufacturing shake-out in the 1980s had a much more immediate effect and was much larger in scale. In those days, partly because of demographic factors (the baby bulge of children born in the 1960s) a decent rate of economic growth was associated with high and rising unemployment. There was even a productivity miracle. These days, weak growth is accompanied by very low unemployment and there is no productivity growth. Either despite or because of this, or because of the deep visions in the country, we appear to be nostalgic for the 1980s. A YouGov poll a couple of days ago showed that by 37% to 28% people think life was better then than now.

In the 1980s, importantly, there was a free trader rather than a protectionist in the White House. And back then Margaret Thatcher was instrumental in creating the European single market, providing a greatly expanded home market for British business. Currently, of course, her Conservative party is trying to navigate how to take us out of the single market.

I think of the 1980s because there was a regular debate, certainly in the first half of the decade, about whether growth was petering out. Those worries were largely misplaced; there were four years in the 1980s when growth exceeded 4%, including 1983 and 1985, and the average over the 1982-9 period was more than 3.5%. This was a period when, notwithstanding those manufacturing job losses, the economy rediscovered its dynamism. We got out mojo back.

Now, concern over whether growth is petering out is more justified. Last week saw the publication of the three purchasing managers’ surveys for manufacturing, construction and services. Two of them, for manufacturing and construction,
showed a drop below the key 50 level, pointing to sectors which are contracting.

The other, for services, picked up marginally to 51, but this is consistent with barely any growth. The UK economy, according to these surveys, is performing worse than the eurozone.

And, according to Chris Williamson, chief economist at IHS Market, which produces the surveys, they are consistent with an economy that “remained broadly stagnant midway through the second quarter”. There was a similar message last weekend from the CBI’s growth indicator.

Spring definitely has not sprung, according to these surveys, nor on the basis of other evidence. After a surprisingly strong first quarter for consumer spending, a 0.7% quarterly rise, the British Retail Consortium suggests retailers are struggling, while private new car sales are down on a year ago.

For business, the deteriorating global environment, partly because of Donald Trump’s trade wars, is a constraint on exporters, though we should not expect a repeat of the surge in imports in the first quarter to beat the original March 29 Brexit deadline.

The news is quite gloomy, and little or no growth is not a good position to be in. In some respects, however, there is nothing much to see here. We knew that the first quarter was unusual, a 2.2% increase in manufacturing output reflecting temporary pre-Brexit activity, including stockpiling, and contributing to a 0.5% rise in gross domestic product.

There was always going to be payback for that in the current quarter, and that is what we are seeing. If growth slows to 0.2% in this April-June quarter nobody will be much surprised. That was expected even before the release of the latest surveys. If it is weaker than that, perhaps dragged down by the huge reductions in vehicle production in April, a few eyebrows will be raised.

The question is where we go from here. Growth of 0.2% a quarter is lamentably weak, and about a third of past norms, and what the economy was achieving in 2014 and 2015. Capital Economics suggests that the latest bout of political uncertainty; the end of Theresa May’s tenure and the Tory leadership contest is likely to mean that growth will “stay lower for longer”, either because there will be a further Brexit delay or because the winning candidate, after realising that no better Brexit deal is available, will attempt to leave without one.

It does not need repeating that a no-deal Brexit would make the current near-stagnation of the economy look good. There is no such thing as a managed no-deal, and a no-deal Brexit would greatly risk tipping a fragile economy over the edge.

Businesses may take some reassurance from the fact that Parliament is opposed to a no-deal Brexit, and will be given the option by the Commons Speaker to exert itself, but that itself opens up whole new areas on uncertainty. How will the apparently irresistible force of most Tory leadership candidates insisting we will leave on October 31, meet the immovable object of the EU’s stated opposition to amending the May withdrawal agreement? I think it will be resolved by a tail-between-the-legs request from the new Tory prime minister for another extension of the article 50 process sometime in October. But there are other possibilities, including a general election and a second referendum.

Uncertainty is the common theme. It is bad for growth, particular when it is combined with a strong sense, particularly among businesses, that politics has lost its bearings. Thinking back again to the 1980s, there were plenty of challenges, including the Falklands War, high unemployment, the miners’ strike and the great power nuclear stand-off in what turned out to be the dying days of the Soviet Union.

Businesses knew, however, that the Tory party was on its side and that they could live with a Labour government. They would struggle to say that now.