One crisis after another
Fraser Nelson 5:25pmMany CoffeeHousers will give a horse laugh to the idea of “green shoots” – especially the idea of Gordon Brown winning a fourth term because a grateful nation will thank him for a recovered economy. It’s a delusion, nothing surer, and the same one Callaghan and Major suffered from. In both cases, there were firm signs of an economic recovery – but the electorate never forgave the government which landed them in the mire. But is Britain recovering? We’ve seen a few developments lately which, given the fun and games elsewhere, have gone unnoticed. So here’s a catchup.
Pick up the financial pages, and you’ll find numerous stories of success: bonuses are back, the corporate debt market has recovered, house prices are moving. Take the Home Builder’s Federation survey – where it goes, house prices tend to follow. And it has shown the sharpest-ever rise in reservations to buy new houses. Confidence seems to be returning to the market (below):
Every recession is different, but not that different. The trajectory of the last two recessions suggest we should be bottoming out soon – perhaps now, in the current quarter (Jul-Aug-Sep period):
Unemployment lags economic growth by about nine months so will keep rising probably until election time. Every time Brown talks about green shoots, the Tories can reply simply: “in the real world, jobs are still being lost.”
But the flip side to this is the deficit. The Bank of England was supposed to use a third of its asset purchase facility to buy private sector assets – yet over 97% of the £150bn is being used to finance Brown’s misbehaviour by buying UK debt. Something like 0.7% of the cash has gone to private firms, of which half to foreign-owned ones like France Telecom and EON. It’s a deeply suspicious, inflationary scam. But that’s another story.
Inflation fears are most certainly back, and BoE will run out of justification to print cash (which it has been doing at about a staggering £1bn a day) and force Brown to rely on real investors with real money to buy his debt. Good luck to him. Foreign investors are dumping UK gilts, and have been for a while. They’re the ones in green, below, who Brown was relying on for some time.
So how will the Office for Debt Management – ie, Brown’s debt-mongers – find buyers for all these IOU notes when the BoE has turned off its printing press? The Treasury view is that UK debt/GDP ratio – at 55 percent in May - still remains beneath that of chronic debtor countries like Japan and Ireland, and that the markets only care about a country’s ability to repay. So it’s not the deficit they worry about, but the debt.
That’s one way of looking at it. Another way is to say that S&P has already turned ‘negative’ on Britain, that most analysts think we’re heading for 90 percent debt ratio and that no country on the planet with debt at that levels has a pristine credit rating. If people think the UK is heading for a downgrade, it’s enough to scare away international buyers – and perhaps the private UK ones, too. Perhaps Brown will make sure the nationalised banks siphon our savings into his debt. Or perhaps there will be a buyers’ strike and the Sword of Damocles will fall.
My point: we could well be starting a long, slow recovery. But when the BoE stops its helicopter money policy, Brown might face a fiscal crisis to replace the economic one.
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chris
July 3rd, 2009 6:29pm Report this commentVery good post, again, Fraser.
As I mentioned in an earlier comment, please start telling us what the TOTAL debt(including all the hidden debt) is heading for, on labour projections, per individual and per family.
paul holdstock
July 3rd, 2009 6:34pm Report this commenti fear that when the true enormity of the pfi debt comes home to roost. simply not defaulting on government debt, may prove beyond us.
with the huge debts of the labour party, BEFORE any general election campaign is factored in, brown will have morally, politically, and financially bankrupted his party, and pretty much done the same to the nation.
with boundary changes, which will dramatically reduce the number of seats in scotland and wales, and with the £50K limit on donations, including the unions, imposed.
the labour party will simply be consigned to history.
the worrying thing is, that many of their loyal voters will drift towards the b.n.p. as has historically happened before in times of great financial crisis in other european countries,
( germany,italy, spain)
the working classes voted in these fascist governments, rather than the middle/upper classes.
what a legacy new labour have left our nation.
Denis Cooper
July 3rd, 2009 7:18pm Report this commentIt seems to me that the Bank will have no choice but to keep the printing presses running for at least the next six months, perhaps gradually slowing them down to a complete stop towards the end of 2010.
By law the MPC has two objectives - to meet the inflation target, and subject to that to support the government's general economic policies - which so far have both pointed towards printing money for the government to spend, and still do.
The problem with comparing this recession with the last two is that this time the background is deflationary, not inflationary, and that has justified printing money on a large scale.
Looking at how rapidly GDP was collapsing, it has to be asked what would have happened if Mervyn King hadn't thrown the switch to set the presses rolling on March 11th, and the answer must be that the economy would certainly not have been bottoming out now.
The Bank has now created £103 billion and passed it to the Treasury through the gilts market, which is equivalent to about 7% of GDP; if the government's budget deficit turns out to be 14% of GDP, then the Bank has already supplied half of that over the last twelve weeks.
Without that supply of new money, the government would have already been forced to cut its spending, which would have hastened the decline of the economy.
Think of the British economy as a Harrier jump-jet. It was nose down in a dive, a power dive which so steep that for a conventional jet aircraft it may have been irrecoverable.
Fortunately the Harrier has an unconventional propulsion system, so while it's still nose down the application of vectored thrust through quantitative easing - printing money - has slowed or halted its descent.
Now the need is to keep it at a stable altitude, while changing its attitude so that it's nose up.
EC
July 3rd, 2009 7:30pm Report this commentA horse laugh?
It's neigh laughing matter Lad!
Bruce Robertson
July 3rd, 2009 7:30pm Report this commentOver-priced piles of bricks are key to economic recovery?
Oh dear, I think this country is in for a rude awakening.
Steve.W
July 3rd, 2009 7:49pm Report this commentIn mid January this year Baroness Vadera was talking about green shoots.
A mild winter followed by plenty of rain and I suppose we have substantial plants now?
Just to remind you, back in January Lord Mandy was calling our PM Moses, how time flies!
Peter
July 3rd, 2009 8:11pm Report this comment"the idea of Gordon Brown winning a fourth term because a grateful nation will thank him for a recovered economy."
Stuff came down my nose.
Jeremy
July 3rd, 2009 8:21pm Report this commentI don't pretend to share your own economic literacy, Fraser, but it's the "dead-cat-bounce" that worries me. Why? Because when the cat bounces, Brown will call a General Election - on the pretext that "everything is getting better". And he might conceivably pull it off. If not, then the Tories will find themselves entering office at precisely the moment the dead cat returns to the pavement - for the foreseeable. And that will land the Tories with the task of doing the nation's "dirty work". Again. Labour will then blame the Tories for the generally dismal state of affairs and claim that everything was alright when they left office - as a sort of prelude to calling their public sector hysterics out on strike (and into the streets) with their traditional cries of "Wicked Tories" and "Evil Cuts". It would all be faintly amusing were it not so dismally retro and predictable.
Susan Hill
July 3rd, 2009 10:45pm Report this commentFraser is the only person in the universe who makes me believe I could one day understand the basics of economics.
TrevorsDen
July 3rd, 2009 11:24pm Report this commentKeep up the forensics. But avoid any walks in the woods.
Ian C
July 4th, 2009 12:10pm Report this commentI would not read too much into the Halifax graph or the Nationwide property index. 15% of a very low figure is a minute no. of new reservations. If they published the absolute numbers, not the % changes you would see the reality.
The Nationwide survey is based on a very small number of deals completed on their books in the most active months of the property year. In such a thin market these are far from representative of the true figures. What needs to be shown is the % of these deals that are cash purchases.
The most important stat. is the Current Recession (To Date) line in the graph that is still dropping - I would add, very steeply at best.
The Bottom? Sometime second half of next year I reckon.
patrickinken
July 4th, 2009 1:10pm Report this commentSurely the nature of the economic recovery, as and when it comes, depends on whether or not there has been a restoration of some sort of financial balance in the household sector, bearing in mind that consumption accounts for about 70% of GDP.
We know that households borrowed much too much in the boom and are having to de-lever against a background of falling house prices and rising unemployment. On the plus side, interest rates - at least, Base Rate - are at an all time low. In previous recessions have the private sector savings ratio increase to 10% in the downturn, but the the preceding booms did not see household debts rising to the levels seen in the recent boom.
We also know that the government deficit is to some extent helping the reduction of household debt.
Looking forward, the pace of economic recovery will surely be feeble if fiscal policy has to be tightened before households have restored their desired financial balance.
Yet the forecasts I read about don't seem to provide the information which would allow judgements to be made about the financial position of households. To the extent there is sectoral information on balance sheets, it seems to be confined to the public sector.
There is no point giving any credence to confident statements about economic recovery until they are backed up by information and analysis that shows that households have sufficiently restored their financial position that meaningful growth in real consumption can resume.
hadrian
July 7th, 2009 11:26pm Report this commentThe danger of what you amusingly refer to as the 'helicopter' policy on money is plain, common sense: that is, we discover we have no money as a nation; our Supreme Leader decides 'Iknow- We'll just print up some money from nowhere!'- and this is supposed to 'save' the nation?!! Good God, we are truly deluded!
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