A strange kind of green shoots: Welcome to the New Normal

 
Allister Heath
GREEN shoots in the economy are a bit like beauty: they are in the eye of the beholder. Such is the confused, contradictory state of the British economy that one can just as easily be bullish or bearish, depending on which facts one chooses to pick out. For every piece of good news, one can find some equally dire survey showing that the economy is continuing to contract.

None of this is surprising: under the economy’s New Normal state, with the private sector deleveraging, government spending still gargantuan and all of the other crippling woes still holding back the UK, the best one can expect is weak growth, with GDP creeping ahead by 1 per cent or so a year. In a boom or in a bust, all of the data would typically point in one, clear direction – but under the quasi-stagnation that characterises the New Normal, the picture will always be mixed.

Take yesterday’s data. The manufacturing purchasing managers’ index fell from 49.6 in August to 48.4 in September; any reading below 50 implies a contraction, which means that the recession in manufacturing has actually just got worse. No green shoots there – just more sickliness. What about new loans, which according to the coalition are about to be substantially boosted by its flagship Funding for Lending Scheme? The programme, which launched recently, has signed up 13 banks and involves the government lending cheap money to banks, with those who pass the most on to consumers and business in the form of fresh credit enjoying the best deal.

Unfortunately for the coalition, those of us who slated the scheme when it was announced and who don’t believe the government can and should be subsidising credit in this way have been proved right – so far, at least. Total borrowing by individuals fell by £0.4bn month on month in August, taking the annualised growth rate over the last three months to zero. Mortgage lending fell by £0.3bn and its 3-month annualised growth is the lowest since data began in 1993, according to an analysis by Citigroup. Lending to UK non-financial companies fell by £2.2bn, the biggest drop since February. Year on year credit growth for UK businesses has now been negative for 40 months in a row. The average fixed mortgage rate is up by 0.52 percentage points since January, to the highest since July 2011.

It is not all bad news. The money supply has bounced back. The broad measure is enjoying its fastest six-month rate of growth since 2008, in a remarkable turnaround which monetarists such as Simon Ward of Henderson believe means that the economy will grow faster than expected. Current real money growth rates are similar to early 2009, ahead of a year of solid economic expansion. There are plenty of other goodish developments. The main tax hikes are over. Inflation is not as bad as it used to be, even though real wages are still falling.

Employment continues to increase, partly as a result of the falling cost of labour. Because the number of people in work has gone up, total spending power is doing better. Consumer expenditure is rising once again. The average forecast for UK GDP growth for 2013 has dropped from 1.8 per cent to 1.3 per cent in the last four months; this will probably fall further. By previous standards, such a performance would be pathetic – but compared to the dire figures seen in recent quarters, any growth could plausibly be taken as proof that the long-awaited green shoots are finally upon us. Welcome to the New Normal.