I’m normally an optimist: I believe that economies grow naturally; that this is generally good for us; that we don’t normally need governments guiding them, that things rebound naturally. But the evidence is building that this year may see a nasty flirtation with renewed recession. In a rushed blogpost, what is my evidence?
- Business pessimism. Pessimistic businessmen don’t invest. Self-fulfilling, I know. But with 75% of the BCC thinking a doube-dip may happen, then it may happen
- Unemployment may rise further. In fact, how could it not? So this survey is no surprise. But higher UE = lower incomes = lower spending
- Whether or not it is sensible our major trading partners all want to grow through exports. Hamish McRae wants their governments to race into surplus soonish.
- The Housing Market (see Buttonwood) may be due another tumble. Believe it or not, 2009 could have been much worse; at least house prices recovered. Now, imagine if it has another go at dropping….
- On to the political risks. We may still be ruled by people who think a 4% yield on gilts is a painful message from the markets. See Ambrose Pritchard here:
The yields on 10-year British Gilts have risen to 4.06pc, compared to 4.05pc and 4.01pc for Spain. So if international bond markets are turning wary of Club Med sovereign bonds, they seem even more distrustful of British bonds. . . . I have a very nasty feeling that markets are about to pounce on Britain. All they are waiting for is a trigger, perhaps a poll prediction of a hung-Parliament or further hints that Tories dare not confront the beneficiaries of state spending.
He is wrong of course: much of the difference must lie in inflation expectations. Real rates are what really matter. Our real yields are 1%, Ambrose. That is not the sign of someone being about to ‘pounce’. Sir Samuel Brittan in this excellent recent speech understands the fiscal tradeoffs far better (see last two paragraphs)
- and fiscal policy is already tightening. See the IFS slide 14. The letter from all of 20 economists to the Sunday Times may not have helped, even though as the TUC blog points out the letter really says very little indeed. (I am willing to be nice to the TUC on this one. I am storing up points because the paper on the Robin Hood tax – flicked through so far – looks dreadful, addresses none of my concerns, and will get its due kicking, I fear).
- The real limits, as I’ve said before, are on political capital. How much do our leaders think they have left? And, as the Robin Hood idea illustrates, the longer this crisis lasts, the greater the risk from daft productivity-destroying ideas.
Against this, what are the reasons for optimism? One, our policymakers are not yet being stupid. The Bank is not being fazed by a temporary inflation blip, like the author of that letter, Tim Besley, was 2 years ago. The IMF has put out a wonderful document (read it) showing the lessons for macro policy, including perhaps a higher inflation target (not a bad idea, though not as good as targeting high nominal growth). Krugman makes a convincing case for doing this in Europe.
For your entertainment, here is an example of a right wing thinker of great repute tying himself in knots trying to maintain his free market purity about the crash, and getting thoroughly destroyed by Economics of Contempt. No reason to be optimistic. Just fun to observe.
Must sign off.