Hamish McRae: The debt mountain is the backdrop to the bankers' bash in the Rockies
Published 30/08/2010 | 10:27
Hols are over, so welcome back to the world of work and to whatever autumn may hold.
It does, for most of us, feel a slightly sombre return, at least as far as economic and financial matters are concerned. Life goes on, and for people whose income is secure the worst that may happen could simply be the continued squeeze on living standards. But I think we all feel that the coming months will not be a bundle of fun.
Why do we seem to feel this way? From a domestic perspective, there is the looming prospect of spending cuts, with the organisations that face a reduction in their allocation of state funds already warning of the dire consequences. There is also a broader sense that the jump in economic activity in the second quarter will not be sustained. The figures were revised upwards last Friday to 1.2 per cent growth, but most of this was the rebuilding of inventories, for final demand rose only 0.2 per cent. This is normal. Companies run down stocks when demand falls and they only start to rebuild when they see it start to bottom out. So you nearly always get a bounce after an economy hits bottom. But this is not sustainable. There has to be a rise in final demand.
So an autumn or winter pause in growth remains on the cards. Some sort of double dip often occurs at this stage of the cycle and there is a good chance we will get one this time round. It may be well into 2012 before the recovery is solid and the economy regains its previous peak. Recessions do follow a broad general pattern, and they vary more in depth than they do in duration.
It is understandable for us to focus on what is happening in the UK for the most obvious reason: it is the matter that most immediately affects us. But it is important to think of the global context because, in the medium term, that will shape things here. If there is a decent world recovery, our problems here become much more manageable; if not, stand by for more domestic disappointment.
Look around the world and you have still to start with the US, the world's largest economy. As it happens, it too disclosed revised growth figures for the second quarter. Confusingly, the US presents quarterly growth as an annualised number so the sharply revised downwards number of 1.6 per cent is actually 0.4 per cent. (Our 1.2 per cent, if annualised, becomes 4.8 per cent.)
But just as the UK figures are not as good as they appear at first sight, the US ones are not as bad. For example, there was a surge in imports so a lot of demand leaked abroad, rather than going into US production. That jump in imports is unlikely to be sustained.
What worries me more than the progress of the US economy, which given the housing bubble was always going to be a scruffy, uneven one, is the hostility in the US to the administration and the Federal Reserve. It is not the fault of President Barack Obama or the Fed chairman, Ben Bernanke, that they inherited an economy puffed up by unsustainable fiscal deficits and cheap money. Correcting the consequent imbalances was always going to take time and both have gone as far as is practical in trying to ease the country off the twin drugs of deficits and easy money as slowly as possible.
The US has the second-largest deficit, relative to GDP, among the G20 economies (the UK has the largest), and the Fed has been pumping money into the banking system for 18 months. Not only is it quite unreasonable to expect it to do much more, it is not at all clear that an even more expansionary set of policies would boost demand. They might have the reverse effect.
Anyone looking for the US to be the principal engine pulling us out of recession is going to be disappointed. Fortunately, much of the rest of the world is still growing solidly. The performance of the German economy is particularly impressive, with exporters optimistic and growth for this year being revised upwards. (German growth was 2.2 per cent during the second quarter, the fastest pace for 20 years.) Eurozone growth may tail off in the autumn but the Brics (Brazil, Russia, India and China) continue to grow swiftly, as does most of the rest of the emerging world. The eurozone's weaker economies remain depressed, for they have huge deficits still to be brought under control, but they are small in world terms. Having a depressed Greek economy is miserable for the Greeks but it does not change the world.
It is against this background of a bottle part-full and part-empty – I would say two-thirds full and one-third empty – that central bankers have been holding their annual off-site jamboree in the Rocky Mountains resort of Jackson Hole.
When economic sentiment is brittle, these meetings always take on a greater significance than they deserve and this year is one of those. So the speech of Ben Bernanke on Friday was closely analysed for hints of what the Fed would do if the economy weakened further.
He acknowledged that the recovery was weaker than expected but was, unsurprisingly, non-committal about what he might do about it, except to put on record that they would take more "unconventional measures" if they had to. So the Fed may buy more US government debt, as it has in the past, to pump money into the economy.
This is essentially what the Bank of England and the European Central Bank have also been doing and taken together there is no doubt that these policies have been successful. The problem with having a central bank buy government debt is that it undermines credibility (and if pushed to extremes leads to hyperinflation) if the government concerned is not seen as putting itself in a position to service that debt.
That brings us to the most disturbing thing of all: the rise in US federal debt. Here in the UK we have taken steps to get our deficit under control. In Europe, most countries are doing so too, with Ireland particularly valiant in its efforts, and able to keep selling public debt as a result. But the US?
Look at the graph. Previous peaks in debt have mostly been associated with wars. The graph from the Congressional Budget Office shows two possible projections. If the less favourable were to occur – well, it wouldn't because the debt could not be sold. But even the more favourable shows a continuing climb. At the moment, the US is able to sell debt to the world at low interest rates for US securities are seen But there is a fragility there that seems to me profoundly alarming.
Moral: once growth is secure – and in another 18 months it will be – the mountain of debt is the next threat to global stability.