Sunday, November 15, 2015
Is Vince Cable right that another economic storm is brewing?
In the Independent, Vince Cable is promoting his new book and is arguing that we are still living with the consequences of the banking crisis of 2008. He says that the damage to banks, government budgets, production and living standards has been enormous and we are far from a return to normality. He warns that there are some ugly black clouds gathering which could portend worse to come:
My current sense of unease is sharpened by the big disparity between backward and forward-looking indicators. This week’s employment figures continued the remarkable run of positive data which has had economic ministers, including me when in government, scrambling to be the first in front of the TV cameras. The UK recovery is a really good story and surprisingly job-rich (even if productivity poor). But employment is a lagging indicator. Recent, forward- looking, surveys of business confidence suggest a deteriorating outlook, with the worst figures since the 2008 crisis.
Policy-makers in the UK clearly believe that the recovery story is set to last. The Autumn Statement due on the 25th of this month is very likely to be based on an optimistic view that the economy will continue to grow strongly and can absorb a period of fiscal contraction – of 5 per cent of GDP in four years – considerably more severe than actually achieved in the Coalition years. And monetary policy, we are told by the Bank of England, is to be tightened, if not immediately. Yet the context is a world in which growth is falling and worse is to come, creating weak export demand. Even if Britain were in great shape the global slowdown would be a serious matter. But, actually, the recovery is precarious and unbalanced.
Like other major developed economies, the UK has a large overhang of debt: overleveraged households, corporates and government. Total debt to GDP (excluding financial institutions like banks) rose in the pre-crisis boom from under 200 per cent in 2001 to 260 per cent at the time of the crisis, the increase coming almost entirely from mortgage borrowing on the back of the surge in house prices. Other developed economies had a similar rise but the UK’s was more extreme than most. Since the crisis, aggregate debt has risen further – to around 280 per cent – with a sharp rise in public debt (roughly from 40 per cent to 80 per cent of GDP) and a modest fall in household and corporate debt, though household debt is now rising back to the previous peak as mortgage borrowers chase a rising housing market. The current obsession with public debt, under a third of the total, obscures this bigger picture.
Cable argues that debt matters because it can have a depressive effect on the willingness to invest, by companies and governments, and on the willingness of consumers to spend. He talks about the idea of “debt deflation”, which he says is one of the ingredients contributing to weak demand in the post-crisis world and the current pessimism about growth.
He adds that many of our economies remain on the life-support system of ultra-cheap money. Official short-term rates are close to zero (or sub-zero as in Switzerland) and there is a reluctance to raise them and snuff out recovery (as happened in Sweden in 2012) and add to the problems of indebted households and companies:
One side-effect of keeping economies growing through cheap money and credit creation through quantitative easing has been the generation of asset bubbles, especially in property markets. Britain demonstrates the problem in an extreme way, magnifying underlying imbalances between housing demand and supply. Double-digit housing inflation is not merely creating appalling social problems and division between classes and generations but grossly distorting investment from productive activities to property holding. The Bank of England has tools of macro-prudential management to curb this inflation but the extreme timidity in using them reveals the high level of dependence on this precarious and dangerous form of growth.
There is another problem too. Governments and central banks have limited room for manoeuvre. Having pushed monetary policy to the limits of what currently passes for acceptable and public debt to what is regarded as sustainable levels, there is no obvious place to go if we hit another recession. Unfortunately the risks of that happening are rising.
Vince says that an over-reliance on China and a weak Eurozone is a recipe for economic grief. In addition, economic stress and the refugee crisis is fuelling the politics of identity, which is in turn leading to the risk of political disintegration and the weakening of the collective disciplines on which the Union depends.
He believes that these threats and worrying trends could lead to a reality check that counters the cheery self-confidence of the UK Treasury. He concludes that the UK economy is in for an uncomfortable period in which severe economic storms are all too plausible.
My current sense of unease is sharpened by the big disparity between backward and forward-looking indicators. This week’s employment figures continued the remarkable run of positive data which has had economic ministers, including me when in government, scrambling to be the first in front of the TV cameras. The UK recovery is a really good story and surprisingly job-rich (even if productivity poor). But employment is a lagging indicator. Recent, forward- looking, surveys of business confidence suggest a deteriorating outlook, with the worst figures since the 2008 crisis.
Policy-makers in the UK clearly believe that the recovery story is set to last. The Autumn Statement due on the 25th of this month is very likely to be based on an optimistic view that the economy will continue to grow strongly and can absorb a period of fiscal contraction – of 5 per cent of GDP in four years – considerably more severe than actually achieved in the Coalition years. And monetary policy, we are told by the Bank of England, is to be tightened, if not immediately. Yet the context is a world in which growth is falling and worse is to come, creating weak export demand. Even if Britain were in great shape the global slowdown would be a serious matter. But, actually, the recovery is precarious and unbalanced.
Like other major developed economies, the UK has a large overhang of debt: overleveraged households, corporates and government. Total debt to GDP (excluding financial institutions like banks) rose in the pre-crisis boom from under 200 per cent in 2001 to 260 per cent at the time of the crisis, the increase coming almost entirely from mortgage borrowing on the back of the surge in house prices. Other developed economies had a similar rise but the UK’s was more extreme than most. Since the crisis, aggregate debt has risen further – to around 280 per cent – with a sharp rise in public debt (roughly from 40 per cent to 80 per cent of GDP) and a modest fall in household and corporate debt, though household debt is now rising back to the previous peak as mortgage borrowers chase a rising housing market. The current obsession with public debt, under a third of the total, obscures this bigger picture.
Cable argues that debt matters because it can have a depressive effect on the willingness to invest, by companies and governments, and on the willingness of consumers to spend. He talks about the idea of “debt deflation”, which he says is one of the ingredients contributing to weak demand in the post-crisis world and the current pessimism about growth.
He adds that many of our economies remain on the life-support system of ultra-cheap money. Official short-term rates are close to zero (or sub-zero as in Switzerland) and there is a reluctance to raise them and snuff out recovery (as happened in Sweden in 2012) and add to the problems of indebted households and companies:
One side-effect of keeping economies growing through cheap money and credit creation through quantitative easing has been the generation of asset bubbles, especially in property markets. Britain demonstrates the problem in an extreme way, magnifying underlying imbalances between housing demand and supply. Double-digit housing inflation is not merely creating appalling social problems and division between classes and generations but grossly distorting investment from productive activities to property holding. The Bank of England has tools of macro-prudential management to curb this inflation but the extreme timidity in using them reveals the high level of dependence on this precarious and dangerous form of growth.
There is another problem too. Governments and central banks have limited room for manoeuvre. Having pushed monetary policy to the limits of what currently passes for acceptable and public debt to what is regarded as sustainable levels, there is no obvious place to go if we hit another recession. Unfortunately the risks of that happening are rising.
Vince says that an over-reliance on China and a weak Eurozone is a recipe for economic grief. In addition, economic stress and the refugee crisis is fuelling the politics of identity, which is in turn leading to the risk of political disintegration and the weakening of the collective disciplines on which the Union depends.
He believes that these threats and worrying trends could lead to a reality check that counters the cheery self-confidence of the UK Treasury. He concludes that the UK economy is in for an uncomfortable period in which severe economic storms are all too plausible.
