Thursday, 7 November 2013

Could rapid recovery turn into quick retreat?


Not the least of this blog's problems over recent months has been keeping up with the increasing rate of economic growth. We said that recovery would feel like a slog. Well, it still does - and it will for many years to come, if income growth is any indicator. But we thought that GDP figures would be pretty moderate as well, and they're probably going to turn out much better for 2013 and 2014 than anyone would have thought just a few short months ago.

But might this sudden burst of energy lead us into another quagmire? Businesses and consumers have curled up in so much fear and doubt, for so long, that they're now obviously going out and blowing some cash. That's great - for now. But the recovery is just as unbalanced, and just as patchy, as all the others that have led us right back to where we started since the end of the post-war 'golden age' in the oil and energy crisis of 1973. Because for all the talk of 'rebalancing' and 'export-driven growth', this incipient boom looks relatively unsustainable, at least over the medium term - just like all the rest.

That's going to cause a great big headache for the Governor of the Bank of England, Mark Carney. The Bank is also tapering off the monetary drip-feed the economy's been on while it was in the emergency room. Soon, and quite soon as these things are judged, it's going to have to start raising interest rates, despite his attempts to signal that he wants to hold out on that as long as possible. Current market sentiment says that this will happen late on in 2015, or perhaps in 2016. If it happens sooner - any time this side of a General Election - then the Government's much-trumpeted satisfaction at appearing to edge us back from the economic brink will evaporate pretty quickly. House prices are one reason. One reason voters increasinly sense that house price rises are a bad idea - despite (of course) wanting their own properties to spiral upwards in value - is that they know that the return of this particular fever pushes the next rung of the ladder - for both themselves and their children - ever further away. But consumers are in a lot of debt overall - which successive Osborne budgets have assumed will rise to offset the Government's own closed pockets. Small rises in interest rates might get us into quite a lot of trouble, quite quickly.

'Public Policy and the Past' offers you two historical parallels.

In 1955 Prime Minister Anthony Eden (above) and his Ministers were confident, purposeful and successful - riding a wave of economic decontrol and growth that put Eden back in Downing Street with an increased majority. Within a few months his Chancellor, Harold Macmillan, came back to the electorate with an Emergency Budget slamming on the brakes. Labour said: 'we told you so'. In 2004 Australia's Prime Minister, John Howard, won re-election boasting about his economic record - and the need to return his Liberal Party to office in order to keep rates low. Interest rates than rose, and rose, and rose - for years.

Both debacles did lasting damage to the idea of central economic management. Both might be replayed over the next few years. For returning to office on the back of a housing boom is not the smartest of plans - ask Conservatives with memories of what came after their 1987 landslide.

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