Fighting for growth

Fresh ideas are needed if Britain is to fight a downturn

In Britain, growth has dropped to a negligible 0.1pc. There are clear signs that Germany is slowing down, and with it the whole of the eurozone. Only this week we learnt that growth in Europe was flagging, and yesterday’s figures on retail sales were far worse than anyone expected. We don’t know for sure yet, but it is starting to look as if the recovery that started after the crash may be running out of steam.

Maybe we shouldn’t be too surprised by that. It has already been an incredibly long expansion by any historical standards. It was unlikely the business cycle had been abolished, so the economy was always going to turn down at some stage. The trouble is, central banks and policymakers are dangerously short of ammunition to fight back. They can’t cut interest rates significantly, and there is not much evidence quantitative easing ever worked. What can they do? Cut some taxes, deregulate the supply side and liberalise trade – and beyond that, probably cross their fingers.

The stock market doesn’t seem to have noticed yet, but there are clear signals that the economy has lost a lot of momentum this year and may well be teetering on the edge of a recession.

In this country, growth in the latest quarter was a mere 0.1pc, and with retail sales and even services under pressure, a quarter or two of negative growth would hardly be a huge surprise. The eurozone is looking in just as bad shape. Growth dropped to just 0.4pc in the latest quarter.

In Germany, retail sales have now fallen for six consecutive months. “Euroland’s economy is foundering on the edge of deflation, and monetary policy is not succeeding in fixing it,” argued High Frequency Economics in a note this week.

For finance ministers and central bankers, that is going to be a nightmare. Monetary policy was meant to have been normalised by now, and budget deficits eliminated, so that, if there was a recession, they would have some tools to try to kick-start growth. It hasn’t gone according to plan. Interest rates are still close to zero. Just about every major economy, with the exception of Germany, is still running a deficit.

There is not much evidence to suggest printing more money would do any good. Indeed, the ECB is still creating €30bn (£26bn) a month and the economy is still sliding backwards.

In truth, to fight this downturn policymakers are going to have to try something different.

First, there is scope for a modest fiscal expansion. In this country, we have finally hit George Osborne’s original deficit reduction target, although admittedly a few years behind schedule. No country has the funds for a major splurge, but austerity can be eased back a little. The quickest and most effective way to boost demand would be through tax cuts. They have an immediate effect and also improve incentives.

Next, deregulation. In the last decade, governments have largely forgotten about the supply side of the economy. But stimulating enterprise remains the best way of boosting it.

Technology and entrepreneurs are the real drivers of growth, and both of those could use a boost. Governments could start freeing up areas such as drones and driverless cars, for example, or lab-grown meats. The first countries to allow a free market in those products will become a destination of choice.

Finally, they should start promoting trade. Alongside deregulation, freer trade is the simplest way of accelerating growth. Indeed, president Trump’s idiotic decision to impose tariffs on a range of products, and the equally ludicrous decisions in Europe and China to retaliate, may well be a major explanation for why the global economy has slowed this year.

Obviously, Trump won’t be involved, but other governments could work on a fresh round of liberalisation. And a post-brexit UK could stimulate trade by unilaterally abolishing its own tariffs.

A slowdown in the economy could be very painful. Policymakers have left themselves recklessly short of ammo.

But there are still responses they can make, especially on deregulation and trade, and they should do so before it is too late – and certainly before we are deep into another downturn.

‘Alongside deregulation freer trade is the simplest way of accelerating growth’