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Green shoots with shallow roots

It’s true there are signs of an economic recovery, says Martin Vander Weyer, but we should also beware a ‘third wave’ of destruction

20 May 2009

12:00 AM

20 May 2009

12:00 AM

It’s true there are signs of an economic recovery, says Martin Vander Weyer, but we should also beware a ‘third wave’ of destruction

It’s springtime in North Yorkshire, which traditionally means lashing rain and temperatures like February. But however unseasonal the weather, nature knows when it’s time to wake up: in the first few days of May, my beech hedge always sheds its dead brown leaves and bursts into fresh green.

And so it goes — with rather less certainty of timing — for the economic cycle. We may poison the ground with too much fertiliser, we may plant scarce saplings in the stoniest places, we may waste money on useless seed that was advertised as miraculously fruitful, we may experience ‘weather events’ we never imagined, but in the end, despite it all, the natural course of events is that green shoots must appear. It is only a matter of when, and how many of them are strong enough to reach full bloom.

That’s more than enough of Gardeners’ Question Time, but you’ll see my point, I’m sure. There has to be a recovery at the end of the current recession, and although there are still a few pundits who believe we’re heading for a new economic ice age, the smart money is beginning to bet on recovery peeping through, just as the Chancellor said in his Budget, before the end of this year.


You can see the trend in commodity markets, where copper and zinc prices have been marching upwards for the past three months, as speculators stockpile in anticipation of a revival of Chinese manufacturing. As for stock markets, in April, despite the swine flu scare, the FTSE 100 index of leading UK shares had its best month since 2003, and it has continued to rally in May. Veterans say it feels like the early months of 1975. At the Sandringham New Year shooting party that year, the Queen Mother announced she had prayed for share prices to improve and miraculously, two days later, they started to do so: within two months they had more than doubled. Real economic recovery was still many months away, but that is very often the case when stockmarkets decide to shake off their bear mood.

In 1975, there was a collective realisation that the worst of the banking, property and oil crisis was over, and that the gloom had been overdone. That is what seems to be happening again now. Beyond the distractions of MPs’ expenses, there has been a surge of ‘green shoots’ stories, winning considerably more column inches than the counterbalancing stories of job losses, such as the threatened closure of the Corus steel plant on Teesside, and warnings from a variety of quarters that it’s far too early to call the turn.

Thus we learned in the past couple of weeks that activity in the British construction industry was looking less bad in April than it has done for several months; that service-sector businesses across Europe have recovered much of the confidence they had lost as recession set in, with optimists now outnumbering pessimists by almost two to one; that first-time buyers are back in the housing market, the number of new mortgages in March was 29 per cent higher than in February, and lenders such as the Woolwich are offering competitive terms again; that John Lewis is ‘heralding a high street revival’ with plans for a new string of smaller stores focusing on home furnishings, and that the fall in sales in the Next fashion chain so far this year has been significantly smaller than the company anticipated.

Add to all that the positive vibes from President Obama that James Doran writes about on page 28, and the wisdom of George Soros, who looks a lot perkier these days than his recession-hit rival Warren Buffett, and who says: ‘The economic freefall has been stopped… National economic stimulus programmes are starting to take effect. The downward dynamic is easing.’ Then there’s the OECD — usually first to pour cold water on upbeat Downing Street forecasts — which now thinks Britain’s recession could end as early as August, a full quarter ahead of when Alistair Darling dared to guess it might finish.

So nature has run its course, and the economic crisis is all over bar the corks popping. Or so I was beginning to think until I ran that theory past one of Britain’s most influential economists — who must remain nameless, but who regarded me bleakly over our lunchtime soup in just the way my tutor at Oxford used to do over small glasses of sherry when it was obvious that I had neither read the required texts nor grasped the underlying principles he was trying to teach me.

Of course, after several months of precipitate decline, there is likely to be a slowing down in the rate at which bad news keeps hitting us, he explained. And if you have a combination of ultra-low interest rates, fiscal stimuli such as the VAT cut last November, a weak pound to help exporters, and extra cash being pumped into the system via ‘quantitative easing’, then almost mechanically there must be some positive impact. Add to that the ‘destocking’ effect, seen most vividly in the car industry: in the steepest part of the downturn, factory output was slashed more severely than declining consumer demand dictated — but as stocks of finished goods run down, output will have to rise to catch up with demand again, even at a reduced level.

None of this, however, can amount to a full-blown recovery without one further element, which is a return to full health of the banking sector, and with it a return to normal levels of lending to businesses that are currently starved of almost all sources of capital for investment. And although most of the world’s major banks look steadier on their feet than they did six months ago, and the interbank lending market has returned to something like normality, they still face mounting bad debts as the recession takes its toll on their customers.

The Bank of England is said to be particularly fearful of a ‘third wave’ of destruction yet to come in the UK financial sector: hence, in part, its recent decision to increase the target for its quantitative easing programme from £75 billion to £125 billion. And Stephen Hester, fugitive Sir Fred Goodwin’s successor as chief executive of Royal Bank of Scotland, summed up the abiding mood of fear in bank boardrooms when he announced an £857 million loss for the first quarter: ‘Some commentators are beginning to talk about economic recovery but we do not see green shoots, and we expect 2009 and 2010 to be very difficult years for the economy and RBS.’

So the true picture is, as Richard Lambert of the CBI put it the other day, one of green shoots with shallow roots, ‘and plenty of dark clouds on the horizon’. That’s exactly what I see when I look out of my window: my beech hedge is indeed as green as it has ever been, but in the small Yorkshire town of Helmsley on the other side of it — more prosperous than most places of its size in the north of England — the two major housebuilding sites have been abandoned, several shops have closed down, and many people are afraid for their jobs and their children’s prospects. Another icy shower rattles the glass to remind me that we’re facing a very long, very cold spring.


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