With the prospect of an autumn recovery looming large, what shape shall it take?
Published 01/09/2009 | 10:51
It is not quite end of the holidays yet but we are going to have to get back to work pretty soon. So will it be an autumn of recovery? And if the answer to that is yes, which I am pretty sure it is, what about the prospects beyond?
The summer has brought two upturns, one in world stock markets, the other in UK house prices. Both have caused some surprise.
The markets worldwide have not only recovered from the March trough but, in the case of the US, have put on their strongest six-monthly rally since 1933. There are lots of reasons for caution, including the very strength of the rally, for this is likely to have sucked in some frothy support, which will be blown away as people take profits.
But the despair of the spring has passed and as global growth picks up there should be more support for share prices in the form of higher company earnings. There is, however, still a long way to go before share markets get back to anywhere near their previous peaks.
The recovery in the UK housing market, by contrast, has hardly begun. Nevertheless, we may have passed some sort of turning point.
A number of surveys have suggested that prices have bottomed out but the most accurate tally of prices that homes are actually sold for, the Land Registry, last week showed a strong, 1.7%, month-on-month rise in prices for July.
Further confirmation that the housing market is improving comes in the mortgage approval data. The British Bankers' Association tally of approvals suggests there is a pretty solid upward trend. It takes a while before approvals translate into sales and you have to remember that approvals fell to a very low level indeed, nevertheless, this does suggest that the market is beginning to function in a more normal way.
The concern in the months ahead will be whether, as the market improves, more sellers will come forward. If that happens, it will be good for turnover but may be bad for prices.
But the main economic news of the past week was the revised GDP figures for the second quarter. You may recall when these first came out I felt they were too bad and would be revised upwards when more data became available.
Well they were, but only by a tiny amount: the economy declined in volume terms by 0.7% in the quarter, not 0.8%. If you look at the data in terms of market prices, rather than in volume terms, there was zero growth in the quarter.
The volume figures may well be revised up further, but even though I can claim I was technically right, it is not much of a moral victory. We will have to wait for the end of this quarter to declare the recession officially over.
So how quickly can we expect it to bounce back? It is manufacturing that has borne the brunt of the recession, with services falling back much less. Household spending was still falling during the quarter, but the really big hit was taken by company investment, which keeps falling relentlessly. It was down 4.5%, following a 7.5% cut in the first quarter.
It is easy to see why this is happening. Companies are strapped for cash and the one thing they can cut quickly is capital spending. Besides, the future pattern of demand is uncertain, so the main sort of investment they will consider is anything that cuts costs rather than those that boost output. That leads to a real concern: might the recovery be slowed by lack of capacity? Or are companies safe to assume that the recovery will be lacklustre?
My own feeling is that there will be a reasonable bounce though the autumn. We will get two quarters of solid growth. After that? I feel nervous about the early part of next year.
The international economic environment will be, at best, only mildly positive. The cut in VAT will have come to an end. The car trade-in scheme will have ended earlier. The Government will have been forced to disclose its proposed cuts in public spending in the pre-Budget report, with a much more savage set of cuts, probably, once the election is past. There will be higher taxation in the pipeline, whoever wins the election (though I think we all know what will happen on that front).
The exodus of high earners in response to the tax increases will be starting to pick up, while those who stay will have a good excuse to trim their spending.
That will hit the top end of the London economy in particular, while further down the scale, demand will be curtailed by the still-rising number of people without jobs. Some forecasters, including Capital Economics, expect the fall in house prices to resume, which won't help demand at all.
Put all that together and it sounds like a bit of a disaster. There is not much point in trying to call what will happen to our economy, or anyone else's, quarter by quarter. Getting the big number for the year is about as much as one could hope for, and, for that, let's set on record that I expect it to be a plus one: ie, growth somewhere between 1.0 and 1.9%. But I could see there being a negative quarter some time during the year before the recovery is assured.
Quite a lot will depend on the new government.
It will face a dilemma. Should it get all the rubbish out of the way fast, which would mean cutting spending as soon as possible and introducing any tax increases right away? Or should it go softly-softly, feeding in reforms and tax increases as the economy strengthens and accordingly might be more able to carry the costs? In political and practical terms there is a strong argument for the former tactic but the economic arguments are finely balanced.
There is a case for both strategies, for while the former reduces uncertainty as people know where they stand and can plan accordingly, the latter ought to enable the economy to follow a more even profile. What you don't want to do is what they did in Japan in the mid-1990s and bring in a tax increase just as the economy is at last starting to grow again, only to knock the incipient recovery on the head. If the next government has no clear majority, then things could be tricky indeed.
The lesson of the past 18 months is that the developed world moves pretty much in a convoy. Some countries went into the recession a little earlier than others and some are emerging a little earlier too. Some have had a more severe recession than others but most large countries cluster around a peak-to-trough decline similar to the UK’s 5.5% drop in output. By the end of this year, nearly all the major developed economies will be showing some growth.
I just think, looking ahead, that there will be disappointments and the UK is as likely to disappoint as anywhere else. Welcome back to the world of work.