UNLIKE some commentators, I don’t think David Cameron did anything especially wrong yesterday. He hinted at Prime Minister’s Question Time that the economy was improving; he didn’t leak the GDP figures.
The statistics will be published this morning; so there is little point speculating about them. But it is worth noting that when the Prime Minister refers to positive figures he means actual growth, and that the double-dip recession is over. But the markets are already pricing in decent growth; so for them a good number would probably have to be higher than 0.6 per cent growth. As ever, Westminster and traders speak different languages.
An exit from recession doesn’t imply a return to prosperity. Wages and UK house prices (though not in prime London) are still falling in real terms. An exit from recession doesn’t even guarantee a return to uninterrupted growth. Nobody knows whether positive GDP in the third quarter will be followed by further growth in the final quarter. The indicators are ambivalent; the construction industry remains in the doldrums; and the only genuine good news is that employment is increasing and so are retail sales. On top of continuing domestic demand and supply-side pressures, the UK remains exposed to global pressures. Unless Congress comes to some agreement, US fiscal policy will automatically be tightened aggressively next year, under the so-called fiscal cliff scenario. In the Eurozone, the ECB has adopted a mechanism for the purchase of government bonds, but nothing has happened yet, all of the various reforms are taking ages to implement, and yesterday’s surveys were grim, suggesting an intensifying recession.
Any positive growth this morning would be excellent news. But the coalition shouldn’t rest on its laurels: the UK still desperately needs a supply-side revolution, and ministers are still dragging their feet. We need a far more aggressive growth strategy.
HERE are three interesting facts, the first two collected by Ian Stewart, economist at Deloitte, and the third courtesy of HSBC’s currency team. All three made me think. Around 97,000 cars were stolen in the UK in 2011, which while still a horribly large number is just a quarter of the number stolen in 1997. This improvement partly reflects the effectiveness of engine immobilisers and central locking and reminds us of the power of technology. Once again, supply-side reform (making it harder to steal a car) trumps demand side management (cracking down on criminals).
The second fact is that the US free market philosopher Ayn Rand’s books outsell Karl Marx’s 16-fold. Regardless of what one thinks of the details of Rand’s objectivist philosophy, it is reassuring to know that its pro-capitalist message wins the market test.
Last but not least, interest rates. HSBC’s research shows that the average G10 nominal interest rate has fallen from about 4 per cent in 2007 to around 1 per cent today. Average real interest rates have fallen from about 3 per cent to zero today, though that is higher than the -1 per cent or so we saw in much of 2011. Such ultra-low interest rates keep zombie companies going and create extreme moral hazard. Few have deleveraged fast enough, and some now even assume that such low rates are here to stay.
They are deeply deluded. If you want to destroy the mood at a smart dinner party, try asking your fellow guests whether they have properly stress-tested their personal finances, and how they would cope when interest rates get back to normal and QE ends. Nobody will ever invite you again.