Belfast Telegraph

Thursday 24 April 2014

View from London: No light at end of the tunnel

At the start of this new year I thought I might be able to offer a ray of economic hope. Regrettably, though, I can't. I have no desire to be another gloom and doom merchant, but I can do nothing about the facts in front of me.

Sadly, the UK economy appears to have run out of luck.

It would not surprise me during this cold January if Gordon Brown and Alistair Darling were listening nervously to the rattling windows of numbers 10 and 11 Downing Street and wondering if the chill wind of recession is about to engulf them.

I've always thought it odd that politicians think they can take the credit for a nation's economic performance.

The UK avoided recession in 2001 when many other countries succumbed, but I'm not convinced this was the result of prudent decisions taken by Gordon Brown when he was Chancellor.

He was lucky, both because he inherited a strong fiscal position from the previous government and because he decided to go on a spending spree just before the global recession struck in 2001, a downswing which the Treasury hadn't predicted.

The biggest problem for seemingly lucky politicians is, of course, that their luck runs out.

I worked at the Treasury in the mid to late 1980s when Nigel Lawson was Chancellor and, for a while, he was the luckiest man alive.

Inheriting a recovering economy from Geoffrey Howe, who had made some brutally tough decisions earlier, Mr Lawson, for a while, rode the waves of an economic boom, allowing Margaret Thatcher in 1988 to describe his budget that year as "quite the most brilliant we have seen".

It was "brilliant in concept, drafting and delivery". Given the dangers associated with the October 1987 stock market crash "Nigel handled everything marvellously", according to Mrs T.

Already, though, Mr Lawson was beginning to lose his earlier lustre. The economy was overheating, inflation rising, the balance of payments deteriorating rapidly and there were the first signs of internecine warfare over Europe.

Mr Lawson is now remembered more for the inflationary excesses of the late 1980s than for the earlier economic successes.

His problem, I suppose, was an inability to distinguish between the genuine underlying improvements in the UK economy in the 1980s with the over-indulgence that paved the way for the subsequent recession.

This government's economic pedigree is now being subject to an uncomfortably probing re-examination.

Difficulties have been apparent for a while now. The trade-off between growth and inflation has been less encouraging in recent years. For any given growth rate, inflation has been higher than it used to be.

The Northern Rock fiasco cannot easily be excused. This was the first bank run since 1866, the only serious bank run involving retail customers anywhere in the world during the current financial crisis and, ultimately, a banking failure that tripped up the tripartite system set up all those years ago by one Mr G Brown.

The housing market seems to have hit a brick wall, turnover is down, prices declining and the buy-to-let market is in big trouble. Estate agents have suddenly started being nice - a sure sign of deep-seated problems in the property market.

But for me, a 1980s vintage economist, one statistic worries me more than any other.

Towards the end of last month the Office for National Statistics revealed that in the third quarter of 2007 Britain's balance of payments was in the red to the tune of £20bn - a most unfortunate new record.

Admittedly, the economy is a lot bigger than it used to be, but even as a share of national output the numbers are enormous.

The ONS reckons the deficit now amounts to 5.7% of GDP.

The only other time the deficit reached this size was, funnily enough, at the end of 1988 and in the third quarter of 1989 when the Lawson express train was coming off the rails.

This revelation is a bolt from the blue. It's not just the news in the third quarter that's shocking. The ONS has also rewritten history.

Those of a Stalinesque temperament would have no qualms about this kind of activity, but the latest numbers make for very uncomfortable reading. Britain has been living on foreign credit – and borrowed time – to a far greater degree than previously thought.

Earlier estimates suggested that the current account had been in deficit to the tune of 2.8% of GDP in the first half of 2007. It now seems that the deficit was actually 4.5% of GDP.

While policymakers have fretted about the US current account deficit, little has been written about the UK's problems. It turns out, though, that as a share of GDP, the UK deficit is as big as America's. And just like the US, the UK economy has motored along on a diet of debt and ever- rising house prices.

To claim that the sub-prime and credit crisis was born in the US alone is nonsense. The UK, having borrowed heavily from abroad to invest in a booming housing market, now has to face up to its own sub-prime crisis.

The Bank of England will have to cut rates further, but as it does sterling may end up falling rapidly (indeed the downward adjustment is already under way).

A weaker currency will, in turn, raise questions about ongoing price stability.

Meanwhile, Alistair Darling won't have his master's luck.

Unlike Mr Brown, Mr Darling inherited a relatively poor fiscal position and simply won't have the opportunity to provide a fiscal bail-out unless he breaks his master's rules.

The economic challenges in the second half of 2007 may turn out to have been only a warm-up act for the main event. Mr Brown and Mr Darling may find that, despite all those years of prudence, 2008 will be the year recession becomes a real threat.

The UK economy's performance in 2008 will not be good.

No more boom and bust? I somehow doubt it.



Stephen King is managing director of economics at HSBC.