The triple A ver­sus the triple dip

The Pak Banker - - OPINION - Stephanie Flan­der

GE­ORGE Os­borne had a sur­pris­ingly good week. The UK econ­omy did not. To­day's PMI sur­vey in man­u­fac­tur­ing shows a fur­ther de­cline in man­u­fac­tur­ing ac­tiv­ity in Fe­bru­ary. March could yet help turn things around, but if next week's sur­vey of the larger ser­vices part of the econ­omy is also weak, there is a dis­tinct pos­si­bil­ity that na­tional out­put will shrink again, in the first three months of this year.

In other words, it is quite pos­si­ble we will see that much talked­about "triple dip".Just as wor­ry­ing, per­haps, is the de­press­ing news on ex­ports in this sur­vey, and the re­vised GDP fig­ures earli- er in the week. As I men­tioned on the 10 o'clock news on Wed­nes­day, those new es­ti­mates sug­gest that the econ­omy did see some growth last year, es­pe­cially if you ex­clude our shrink­ing off­shore oil sec­tor.

But, far from sup­port­ing the re­cov­ery, our ex­port sec­tor ac­tu­ally pulled it down in 2012, with net ex­ports sub­tract­ing about 0.8 per­cent­age points from the an­nual rate of growth. To­day's man­u­fac­tur­ing sur­vey shows new ex­port or­ders de­clin­ing in Fe­bru­ary, for the 14th month in a row.

On this ev­i­dence, we are not ex­port­ing our way out of de­pres­sion. At all. What can the chan­cel­lor do about any of this? That is the ques­tion we will all be ask­ing, in th­ese last weeks be­fore the Bud­get. It is cer­tainly a more im­por­tant is­sue, for most peo­ple than the loss of Bri­tain's AAA credit rat­ing. (In­deed, for ex­porters that down­grade might even be help­ful, at the mar­gin, to the ex­tent that it adds fur­ther down­ward pres­sure to the ex­change rate.)

The chan­cel­lor came out fight­ing, on Mon­day, in the wake of that down­grade by Moody's. Where many around him - even in his own party - saw the loss of the triple A as a hu­mil­i­at­ing fail­ure, Mr Os­borne de­cided to see it as fur­ther con­fir­ma­tion that he had been right all along.

You might think that's stretch­ing things a lit­tle. But the way Mr Os­borne sees it, the coali­tion's strat­egy in 2010 was based on the idea that the hole in Bri­tain's pub­lic fi­nances would not fix it­self, and could fa­tally dam­age the coun­try's stand­ing in world mar­kets, if left to fester.

On this line, the Moody's de­ci­sion shows just how right he was. The im­pli­ca­tion is that we would have lost the top credit rat­ing even sooner, had Labour been in charge, with a some­what looser ap­proach to bor­row­ing. This ar­gu­ment is cor­rect, on its own terms. Moody's cer­tainly did not down­grade the UK be­cause it felt that the deficit re­duc­tion pro­gramme had pro­ceeded too quickly. It's the rise in the stock of debt that has them wor­ried, not the pace of aus­ter­ity.

How­ever, crit­ics of the government's ap­proach, such as Martin Wolf of the FT, would say there's a hid­den as­sump­tion in this whole line of ar­gu­ment. That is that there was no alternative ap­proach that would have de­liv­ered faster growth - and maybe lower bor­row­ing as well. On this view, the ar­gu­ment over whether or not "aus­ter­ity" killed the re­cov­ery misses the point. The Bank of Eng­land and the Of­fice for Bud­get Re­spon­si­bil­ity think the slow pace of growth since 2010 owes more to the eu­ro­zone and im­ported in­fla­tion than it does to Mr Os­borne's tax rises and cuts in pub­lic in­vest­ment.

Maybe they are right. But Mr Os­borne's crit­ics would say he might still have done more to off­set th­ese neg­a­tive fac­tors, and so pro­duce a stronger a re­cov­ery.

If you be­lieve the IMF's new, higher es­ti­mates for the so-called "fis­cal mul­ti­plier" (and some do not), a stim­u­lus pro­gramme, or a more growth-friendly com­bi­na­tion of spend­ing cuts and tax rises - with fewer cuts in pub­lic in­vest­ment - might well have de­liv­ered faster growth af­ter 2010, with­out mak­ing the fis­cal sit­u­a­tion any worse than it al­ready was. Bor­row­ing, on this sce­nario, might even have ended up be­ing lower, thanks to faster growth in tax rev­enues.

This is, ap­par­ently, what Ed Balls be­lieves. But he did not do a very good job of mak­ing the case in Par­lia­ment this week - which may partly ex­plain why Mr Os­borne came out of this week sur­pris­ingly well. For econ­o­mists, as op­posed to politi­cians, there is not a lot of point de­bat­ing what might have hap­pened af­ter 2010, and whether a dif­fer­ent ap­proach to the deficit might have brought more growth. We can't rewind the tape and do the last two years again. But there is all the rea­son in the world to think about what the au­thor­i­ties can do to sup­port growth right now.

Clearly, the Bank of Eng­land is think­ing about that quite hard. Three mem­bers of the Mon­e­tary Pol­icy Com­mit­tee voted for more quan­ti­ta­tive eas­ing last month - in­clud­ing the Gov­er­nor him­self. It might not take much more bad news for a ma­jor­ity to vote that way next week. And we know from tes­ti­mony this week from Paul Tucker that other more rad­i­cal steps are also be­ing con­sid­ered - at least by some. Many in the city and in all of the main par­ties would like Mr Os­borne to be think­ing the un­think­able as well. He has shrugged off the loss of Bri­tain's top credit rat­ing, but the ques­tions about what, if any­thing, he can do to kick-start growth are go­ing to be harder to shake.

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