ONE of the government’s daftest policies is its underpinning of bank lending, a nationalisation of credit in all but name. The biggest losers from the funding for lending scheme have been savers. The effective average savings rate for new deposits has collapsed from 2.75 per cent in September to a miserable 2.11 per cent in December. After tax and inflation, real savings are being slashed by up to two per cent a year. It’s a shameful scandal.
The number of mortgage approvals has jumped – but interest rates on business loans to small firms increased from 3.39 per cent in November to 3.65 per cent in December. Rates fell at first but are now little different to the 3.69 per cent they were a year ago. The policy has failed: it will fuel another bubble in the housing market while decimating savers and doing nothing for small businesses. What a shambles.
AMERICA’S GDP TAKES A HIT
It came as a shock to many to see US GDP contract in the last quarter of the year, even though the tiny 0.1 per cent fall could easily be revised away. Yet this shouldn’t have surprised anybody: the uncertainty surrounding the fiscal cliff was always going to have a major effect.
The silver lining was that the decline in output was largely caused by reduced inventories, as well as a drop in defence expenditure. Consumption, business investment and house building – the components that matter – rose.
It would certainly be wrong for anybody to believe that spending cuts are killing off the recovery. Over the past three years, the American economy grew 4.8 per cent even though the US public sector shrank by around 6 per cent, massive belt-tightening far greater than anything seen in the UK, according to RBS. In fact, the public sector shrank in 10 out of the past 12 quarters.
Now that is what I call radical austerity, not the sort we have seen in this country. In the UK, government spending has barely gone down in total terms, including interest spending – and yet the economy remains substantially smaller than it was prior to the recession.
The real lesson from yesterday’s GDP data is simply that any recovery needs the private sector to be strong; the lesson from the past few years in the US is that spending cuts by the public sector can easily be absorbed by the rest of the economy. A much greater worry is the impact of the payroll tax hike in the first quarter, which could conceivably trigger another recession. It is too soon to be making these sorts of predictions but there is certainly a real risk of another nasty surprise.
The market shrugged off the data, partly because it is still being pumped full of cheap money by Ben Bernanke. Charles Dumas of Lombard Street Research worries about Wall Street’s longer-term health, especially if the economy worsens in the first quarter of this year. He calculates that seasonally adjusted fourth quarter earnings remain little changed from the level that has prevailed since mid-2011. He also worries that US equity markets’ actual price to earnings ratio (p/e) of 15 has been massaged downwards by a “smoke and mirrors” process – the use of “operating” as opposed to “as reported” profits – to a cheaper-sounding 13.6, and that the prospective p/e of 12.2 implies implausibly high earnings gains of 11-12 per cent.
Despite globalisation, the Western world still needs the US economy to act as its locomotive. Yesterday’s shock contraction in GDP should serve as a warning that its recovery could still grind to a screeching halt, dealing the rest of us another blow.