Austerity won’t cause a double-dip
WHENEVER the stock market tanks for an extended period of time – three weeks and 10 per cent seem to be a good rule of thumb – a strange mix of panic and excitement invariably breaks out in some quarters of the City, aided and abbetted by the media. Inboxes fill up with excited notes predicting a double-dip recession, with anybody who dares to disagree dismissed as a perma-bull or worse.
I remember when all the talk in 2002-2003 was of a double-dip, which never materialised; Morgan Stanley even started handing out special “double-dip” candy at its briefings. The good news is that the Cassandras are almost certainly wrong this time also; there will be no double dip – and no new recession made in Downing Street, contrary to what all those who hate the coalition and its planned spending cuts are claiming. We are in for a lengthy period of sluggish growth and a painful readjustment after years of borrowing uncontrollably – but then we knew that already. Sentiment indicators have peaked globally; the price of oil has slumped; China’s growth may be slowing; the US seems unable to create jobs and the Eurozone remains a weak spot, especially when it comes to its deficits, its crippled banking system and problems with the European Central Bank’s provision of liquidity.
But there are also plenty of good signs: world trade remains strong (forget about the Baltic Dry Index; all other indicators are good); the UK money supply is growing at a much more solid rate; all parts of the private sector are expanding again; the financial markets trust the government; and bond yields have collapsed.
Those who worry about a recession usually point to the fact that we are facing a coordinated, pan-European fiscal tightening – and worry that this will cut demand and hence activity and jobs, triggering a vicious circle of recession and deflation. Yet even Keynes himself would have had no truck with this argument. There is no way that a budget deficit of £150bn a year and a state sector worth half the economy was something Keynes would have ever encouraged. The economy is growing again, which to a real Keynesian ought to suggest that the structural deficit should be cut (and it is equally absurd to describe the current situation as a liquidity trap, whereby monetary policy becomes useless and aggressive fiscal policy supposedly becomes the only answer, because the latest data shows that quantitative easing and low rates have had a large impact).
In any case – especially at present levels of public spending – high deficits discourage private spending and therefore are not expansionary but indeed contractionary. Already, the promise of a sharp decline in the deficit has had a positive impact: gilt yields have collapsed, cutting the public and private cost of borrowing. As fewer gilts are issued, there will be more funds available for private firms, hence fuelling private growth.
As the US employment figures last Friday revealed, the opposite approach – continue spending and borrowing as if there were no tomorrow – is hardly the answer. Opponents of the coalition’s plans never highlight the failure of Barack Obama’s stimulus plans to kick-start the US economy. So I have no doubt that – barring a total collapse in the Eurozone – there will be growth in the UK economy in the year ahead. There won’t be much of it, and it won’t feel like a recovery, but growth it will be.
allister.heath@cityam.com