On the face of it, the fall in UK national output (GDP) reported on Tuesday just adds to the mounting bad news for everyone, not least Chancellor George Osborne. Fears about a ‘double-dip’ recession, which would officially arrive if a further decline takes place in the first quarter of 2011, now look considerably more likely. Not surprisingly, most Red Pepper readers will now be concentrating their energies on the fight against the cuts. But for us as much as for employers and the Tory government, it’s important to keep a close eye on current developments in the economy. So what exactly does all the bad news add up to?
First of all, we live in a world in which the financial markets pretty much dictate the government’s policies, or at least their room for manoeuvre. Osborne’s attempt to blame the fall in GDP on the bad weather seemed to cut no ice in the City. There, the pundits and the speculators mostly concluded that the recovery had now stalled, and that the Bank of England would therefore delay the long-expected increase in its official lending rate of 0.5%.
Looking back on the growth recorded for July-September 2010, it now seems all too clear that the sudden boost to construction activity in that period owed more to a rush to complete current contracts before the spending cuts hit local authorities and government departments alike; so the sharp fall in the last quarter was as much a case of back to normal as the result of the big freeze.
In any case, last week’s unemployment figures made grim reading, back above 2½ million, with a particularly big rise in youth unemployment - and this well before the public sector cuts start hitting home in April. What is more a host of recent attitude surveys, among households as well as businesses, have suggested growing pessimism about our economic prospects and therefore a reluctance to make any big spending commitments. Add in the unexpected attack on the coalition’s lack of a growth strategy from the outgoing CBI chief Richard Lambert, and Osborne surely couldn’t maintain for much longer that shiny smile and confident air.
But although there obviously is a Plan B somewhere on his desk – to slow down the spending cuts and encourage the Bank of England to pump more cash into the banking system – the Chancellor is terrified that a change of direction would be seen by his masters (that’s the financial markets, remember, not us) as a sign of ‘weakness’.
Osborne himself has cited the International Monetary Fund’s latest update to its World Economic Outlook, issued on January 25, in support of his policies. The IMF, he said, approved of a robust approach to restoring the public finances. Well, yes, but only up to a point. The IMF update didn’t actually discuss the UK as such, and they qualified their approval of spending cuts by putting them in a wider context:
“A host of measures are needed in different countries to reduce vulnerabilities and rebalance growth in order to strengthen and sustain global growth in the years to come. In the advanced economies, the most pressing needs are to alleviate financial stress in the euro area and to push forward with needed repairs and reforms of the financial system as well as with medium-term fiscal consolidation. Such growth-enhancing policies would help address persistently high unemployment, a key challenge for these economies.” (Update, p.7)
Now the Eurozone governments have, with a lot of delays and haggling, begun to sort out the debt problems afflicting their ‘periphery’ (that is, Greece, Ireland, Portugal and Spain). They have created a Financial Stability Facility which has just successfully issued the first zone-wide Euro bond. The Chinese government in particular is keen on this development, because they want to diversify their own bond purchases away from the USA. But the markets, which as always in an uncertain recovery are particularly prone to rumours, fads and panics, are still worrying away at this issue. Oddly enough this is good news for Osborne, since problems in the Eurozone make British government bonds more attractive to investors.
However, there are two other global issues which we need to keep an eye on. The first is the one raised by the IMF, namely ‘reforms’ of the financial system. Last week (22 January) the chair of the Independent (sic) Banking Commission, Sir John Vickers, gave a lecture on the progress that the Commission is making on this. Given the often-stated views of the Governor of the Bank of England – and most academic commentators – it was hardly surprising that he highlighted the need to segregate the risky activities of ‘investment’ banking (issuing and trading financial assets of all kinds) from the activities of ‘commercial’ banking (dealing with payments and routine borrowing by households and firms).
The British Bankers’ Association spokesperson, Angela Knight, immediately announced that if new regulations were brought in that were too tough on the banks, they would up sticks and relocate abroad. Short of revolution (not a bad idea?) the way to head off this threat is to make sure that pretty much the same regulations are brought in everywhere, and especially in the USA, UK and the Eurozone. In the more than two years since the collapse of Lehman Brothers, progress on this has been painfully slow. In the USA, legislation was finally passed in July 2010 (the Dodd-Frank Act), but implementation is still being delayed, making because the banking lobby made sure that the proposals were incredibly cumbersome and riddled with contradictions. In the Eurozone, progress is also slow, partly because so many banks are massive holders of those dodgy Irish, Greek, Portuguese and Spanish government debt; so any financial squeeze on the banks threatens efforts to calm down the bond markets.
The second big issue is the tensions between China and the USA. Basically, for years there has been a dollar merry-go-round: