We are still in the shadow of the financial crisis
Businesses and households are less confident about the future, reflecting a global slowdown in growth
The Beast from the East, a flu epidemic in Germany, strikes in France, rising food prices in Japan, continued uncertainty over Brexit – all these factors provide a degree of explanation for the pronounced slowdown in growth that has spread like a virus through virtually all major advanced economies so far this year.
But they also have an air of wishful thinking about them. Finance ministers desperately want to think the current soft patch no more than a temporary aberration. No one is prepared to admit that something more sinister may be at play.
Only a few weeks ago, the International Monetary Fund was hailing a new era of synchronised growth in the world’s leading economies; could this happy confluence of circumstance already be petering out? It is a deeply depressing thought that so long after the financial crisis we should still be living in its shadow, but it is also one that we must at least begin to entertain.
Not so Philip Hammond. In his spring statement, the Chancellor, belying his reputation as the Cabinet’s resident Eeyore, declared himself to be “positively Tiggerish”. And so he remains, despite the mess the Government has got itself into over Brexit. Inflation is coming down, and with a tight labour market and an easing of public sector wage restraints, pay is going up. A return to real, inflation-adjusted, earnings growth seems once more to be within our grasp, and if that happens the slowdown in consumption that has dogged the UK economy since late last year should begin to ease.
For the moment, however, things don’t look so good; all too briefly glimpsed, those sunlit uplands are again receding from view. After maxing out on credit cards and car loans, and slashing their rate of saving to some of the lowest levels on record, households seem to have moved back into belt-tightening mood. Growth in consumer lending, a not insignificant driver over the past two years of overall economic growth, all but collapsed in March.
More worrying still – since the credit figures are a lag indicator and may indeed be substantially explained by the arctic weather – are the more forward-looking monetary aggregates. These are religiously tracked by the economist Simon Ward of City fund managers Janus Henderson, and for months now he’s been sounding the alarm based on their steadily weakening trend.
If the collapse in first quarter GDP growth announced last week was just a weather-induced blip, these monetary data would by now be turning up again; but they are not. Households and companies that intend to spend more will in preparation typically shift money from illiquid to liquid assets such as cash deposits. As things stand, this is not happening on a scale that would be commensurate with a sharp recovery in growth. Whatever the reason, businesses and households feel less confident about the future. Much anecdotal evidence confirms the sentiment; even my builder notes a distinct chill in the air.
Released from his duties as the Treasury’s permanent secretary, Nick Macpherson has been quick to tweet that Treasury analysis of the economic consequences of Brexit – much derided at the time as “Project Fear” scaremongering and then apparently disproved by the subsequent pickup in growth – “looks more prescient by the day”. Whether it is Brexit itself – or the Government’s crass mishandling of the task – that is damaging economic confidence is a debatable point. But the fact is that the slowdown is global in scope, even if somewhat worse in the UK than elsewhere.
Even in the US, which is in the midst of a giant tax giveaway, growth has slowed markedly. In the Eurozone too, now that the European Central Bank has begun to remove the monetary steroids of quantitative easing, growth is again stalling, compounding the slowdown in the UK. Britain thus faces a double whammy of slowing domestic and external demand.
Few yet believe this is going to end in an outright recession – technically defined as two successive quarters of negative growth. But already it has caused the Governor of the Bank of England, Mark Carney, to perform yet another handbrake turn on interest rates. He’d hoped to put them up again at next week’s meeting of the Bank’s Monetary Policy Committee. That now seems unlikely. It’s a remarkable outcome, but the way things are going, Carney will have gone through his entire six-year term by the time he leaves in July next year without having managed to lift Bank Rate from its crisis-induced floor of 0.5 per cent by even so much as a quarter point.
Since Carney cannot credibly cut rates any further – we have in any case had quite enough monetary stimulus – it will fall to the Chancellor to do the heavy lifting this time around. For now, Hammond is still planning to squeeze output with pre-packed austerity. The case for extra spending on health and defence, and indeed for competitive Trump-style tax cutting, is in its own right already a strong one. Pretty soon, there may be an economic reason for it too.