THERE is, once again, a whiff of economic optimism in the air. Some of it is grounded in fact; much of it isn’t; all of it is tentative. Let’s hope we do see a little growth soon; something is always better than nothing.
What is certain is that any progress in the UK will continue to be throttled by the Eurozone crisis; it is Spain’s turn to be in the headlines, with the latest prediction being that its GDP will shrink by one per cent this year. China is doing a little better, but its expansion nevertheless remains comparatively weak. America’s Institute of Supply Management (ISM) manufacturing index fell to a three-month low of 51.3 in March yesterday, adding to a picture of a wobbly global economy.
But I suspect that many British commentators have become so conditioned by recession and crises that they have downgraded their standards and expectations, and that the optimists are actually merely realists. These days, what is described as “strong” growth is actually any kind of growth. It will therefore be seen in some quarters to be a “triumph” if the economy were to grow by the 0.6 per cent the Office for Budget Responsibility is predicting for this year, after last year’s pathetic 0.2 per cent. But when the (likely) absence of a triple-dip recession passes as good news, we know we are in trouble.
Three key UK key sectors are dragging down the rest: finance, construction, and oil and gas. Their woes have helped to mask the limited growth in some stronger parts of the economy. Proper growth in at least two of these three areas would be essential to converting the current stagnation into modest expansion. The most likely first candidate for such a recovery is probably construction: there have been some very early indications that some of the coalition’s planning reforms might finally be starting to have an effect, but it remains too soon to come to a firm conclusion.
The reality is that the UK economy is set for a lengthy period of almost unbearably weak growth. We will crawl along for the next few years, dragged down by a range of factors that include high inflation that is eroding real wages and savings, financial repression which is diverting resources into financing the state, an overhang of bad debt, an ultra-leveraged overall economy, a crazy planning system and other disastrous red tape, a high tax and government spending burden, a decision to make energy far more expensive than it needs to be, a regulatory-imposed squeeze on bank balance sheets and a continued onslaught on the City. Under such circumstances, sustained and genuinely strong growth – and I’m not referring to the odd jump in output – is simply impossible.
REFORMING THE STATE
ALMOST three years in, some of coalition’s reforms are finally kicking in. Iain Duncan Smith’s welfare shake-up, which opinion polls show remains remarkably popular, is a first step in the right direction and to be welcomed. It must always pay more to work than to be on welfare. But it remains to be seen whether the government will be sufficiently competent to implement these changes without devastating problems, including with IT systems.
The new financial regulators will be a big improvement on the FSA. But we have replaced a domestic tripartite system by another multi-polar regulatory system, with powers shifting to European institutions in an opaque manner, blurring responsibilities. Until the EU’s increasingly powerful tentacles are chopped off by a determined government, financial regulation will remain in an unsatisfactory state of flux.
Follow me on Twitter: @allisterheath