BELIEVE it or not but many forecasters are becoming more upbeat about Britain’s prospects for the coming year. HSBC, whose predictions are always cautious, is expecting growth of 2.2 per cent, much higher than the consensus; others are also becoming more optimistic.
I remain more downbeat. But it is worth taking a look at some of the arguments for bullishness, if only to show why they are not convincing. It is true that in the first year after the last three major downturns – 1976, 1982 and 1993 – the economy grew by 2.6 per cent, 2.1 per cent and 2.2 per cent respectively. Unfortunately, the present recession wasn’t normal: it was accompanied by unprecedented monetary reflation and an equally extreme budget deficit. Both of these policies need to be reversed, starting this year; this will hit the recovery.
Budget deficits have often been tightened without too many problems in the past – and when deficits are so high, cutting them actually boosts growth – but it is best that the process takes place via spending cuts, not tax hikes. Unfortunately, we will be getting plenty of the latter.
Meanwhile, ending quantitative easing, while urgently necessary, will push up the cost of borrowing and could even force a sterling crisis if foreign investors refuse to buy our gilts.
The bulls are right on one point: much stronger credit growth is not a prerequisite for better GDP growth – the economy accelerated for several years in the early 1990s before bank lending started to recover, as Capital Economics notes. And even if credit availability remains constrained compared to 2007, access to loans remains easier than it was in the 1970s or 1980s, when credit markets were under-developed and tied up in miles of red tape.
Yet one of the biggest drags to growth in the years ahead is that consumers will have to pay back more debt. Sure, savings as a share of income shot up from an absurd -0.7 per cent in the first quarter of 2008 to a more respectable 8.6 per cent in the third quarter of 2009, leaving it above its long-run average of just under 8 per cent. This is progress. But the rise has been driven by strong disposable income growth, powered by ultra-low interest rates, rather than savage cuts in spending; as soon as mortgage rates jump back, many will save less. The savings ratio also remains lower than after the previous recession.
Debt has fallen from 174 per cent of UK households’ income to 155 per cent – but was just 105 per cent a decade ago. Nobody knows what the “right” level of debt is but it is almost certainly much lower than the present situation. Debt as a percentage of households’ assets remain above the early 1990s peak – even though house prices remain artificially high and could tumble again in 2010.
All of this suggests the economy is set for years of paltry growth, with a second, devastating crisis a possibility if the public finances aren’t tackled soon. It is far too soon for optimism.
CALMING DOWN AT LAST
Here is an interesting though unscientific anecdote. I was a guest on James Max’s LBC radio show yesterday afternoon, where we spent an hour discussing City bonuses – but the calls and texts were less hostile to bankers than on similar shows I took part in before Christmas. It may be that the tide of extreme, rabid hostility against anybody who works in finance may be slowly turning. I certainly hope so.