SCOTTISH PERSPECTIVE
Emergency economic measures taken in 2008 have lasted too long – time to return to normal, writes Bill Jamieson
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Rollercoaster stock markets? Jitters and apprehension? Anxious hyper-ventilating stockbrokers? Bring it on, I say.
It’s been sudden and sharp, and I hope it’s salutary. It’s supposed to be. For we need more than a “correction” – the current vogue platitude of the pundits.
That implies a short-lived interruption until nerves settle and stock markets return to status quo ante. But what is unfolding is a change of contour and landscape, not just a passing blip before we resume the journey “as normal”.
And what have we come to regard as “normal” now? Ultra-low interest rates? Central bank money printing on a vast scale? Inflation permanently pacified? A nine-year rise in stock markets to continue forever?
How foolish of US president Donald Trump to brag about the seemingly relentless rise of share prices on Wall Street. In December, he boasted the market had hit new highs 84 times since his election victory. He repeated the boast at the World Economic Forum in Davos. Neither politicians nor pundits should ever lay claim to validation by the behaviour of stock markets. Their movements are erratic, largely unpredictable and beyond the powers of the high and mighty to order. Indeed, the moment they try to lay claim for responsibility, it can be a powerful “sell” signal.
And how much of this ascent was due to Trump-o-nomics? Cast your minds back through the mists of time. In the wake of the great banking crisis (2007-9), interest rates were slashed to “emergency” levels below 1 per cent – a collapse without parallel in modern financial history.
In addition central banks – here, in America and across Europe – pumped in record amounts of liquidity to stave off a severe recession (and in the eurozone, a Greek collapse).
These measures, we were assured, were temporary, short-term expedients until “normality” returned.
But these emergency measures have lasted nine years – long enough for pundits, investors and the public at large to come to regard them as almost permanent features of the landscape. “Normal” economic conditions were constantly deferred.
However, today the global economy has entered into something more akin to a Goldilocks period. Consensus forecasts suggest overall growth of close to 4 per cent. Emerging markets and China in particular lead the advance, but developed economies, too, have joined in.
America is experiencing ever more job creation and rising payroll earnings. Europe, so long a byword for stagnation, is enjoying growth of around 2.5 per cent.
The truth is that the contours and the landscape have indeed changed – and for the better. The biggest perceived threat now is not recession but a return of inflation, requiring a policy response through higher interest rates. That does not mean a return to the levels that prevailed before the financial crisis, but it does signal a marked move away from the emergency era: there was nothing ‘normal’ about that.
Only the UK, notwithstanding record levels of employment, seems to be missing out on this global party. But here, too, growth forecasts are being nudged upwards – despite the gloomy prognostications from the Treasury.
Last week accountancy giant EY raised its prediction for UK growth in 2018. Now the National Institute for Economic Social Research has joined in, predicting Britain’s economy will grow by 1.9 per cent and repeat this in 2019, up from previous forecasts of 1.7 per cent, and growth of 1.8 per cent in 2017. The forecast is based on the Bank of England raising interest rates in May and then by 0.25 percentage points every six months until rates reach two per cent. NIESR has also hiked its global growth forecasts, predicting worldwide GDP growth of 3.7 per cent this year, up from earlier predictions of 3.5 per cent. That leaves Scotland looking all the more of an anomaly. Our economy here grew by just 0.2 per cent in the July-september quarter, taking the 12-month growth rate to 0.6 per cent – less than half that for the UK as a whole. And according to the Scottish Fiscal Commission, we are doomed to experience growth of less than 1 per cent for another three years: a state of perpetual rigor mortis to which the Scottish Government’s most marked policy response is… higher taxes.
There are some encouraging signs – an improvement in export performance and a pick-up in North Sea oil interest in the wake of the price jump in recent months.
But a notable handicap for business is the continuing confusion and uncertainty over Brexit. Eighteen months on from the referendum and we seem little clearer of the settlement terms.
At the weekend, we heard (again) that the Prime Minister has ruled out staying in the Customs Union. But this was a repeat of previous “clarifications” – indeed, news of the UK government’s Brexit position seems to be on a continual repetitive loop.
Yesterday the British Chambers of Commerce warned that the patience of business leaders “is wearing thin” with ministers’ indecision. It issued a strongly-worded statement saying that “businesses need those elected to govern our country to make choices”.
In an open letter to the Prime Minister, the BCC’S leaders said the perception of their 75,000 member firms was of “continued division” at the top of government. “Even amongst the many optimistic, future-oriented firms – those who see opportunity in change – patience is wearing thin,” they added.
I had personal experience of this as I was scheduled to speak at a business conference down south on the economic outlook. But this event has been postponed and I gather other such events have been pulled due to the absence of clarity on Brexit negotiations. Business investment is a consequent casualty.
Yesterday saw critical Cabinet meetings unfolding amid a fraught atmosphere in the Conservative party after pro-remain MP Anna Soubry urged that vocal Eurosceptics such as Jacob Rees-mogg should be “slung out” and warned Theresa May against seeking a compromise.
It will not have heartened business that senior government sources were playing down the likelihood of significant progress this week with one warning the most likely outcome was “more fudge”.
A return to normal in markets is to be applauded. Unfortunately, not all “returns to normal” are cause for cheer.