Recession news is not (quite) all bad…

At first glance the IMF and Institute of Fiscal Studies reports on the state and prospects for the British economy are very depressing. The FT leads the chorus

Britain is facing the deepest recession of any big industrialised economy, the International Monetary Fund signalled on Wednesday as it said that the UK economy would shrink 2.8 per cent this year…The IMF forecast for the UK is 1.5 percentage points below its previous estimate.

But let’s be counter-intuitive. I’m going truffling for signs of green shoots. For instance, the following negative message is not the only way to express the thought.

The IMF projects that Britain will grow by only 0.2 per cent in 2010.With the government obliged to call a general election by the spring of 2010, ministers have been hoping that the economy will bounce back from the middle of this year to record growth of around 1.75% next year. The IMF said it expected the UK to register virtually no growth at all in 2010, with GDP expanding by 0.2%.

You could put it more positively and say that although the recession will be deeper than expected, it won’t last for ever. Growth will start in 2010. And there’s more encouraging news on battered old sterling from the BBC’s Robert Peston!.

Here’s some mildly encouraging news however. I interviewed George Soros, the hedge-fund legend, this afternoon – and he thinks most of the bad stuff about the UK is in the price. Or, as he put it, he thinks that sterling may have fallen enough, for now (which is something of a contrast with that mega-bear of the UK, Jim Rogers, who used to work with Soros).

The separate report by the Institute of Fiscal Studies claimed that the victor of the next election would have to put up taxes or cut spending by £20bn – and saddle us with higher than 07-08 levels of public debt for 20 years .Aaaghhh!!!

BBC Economics editor Stephanie Flanders, back from months of maternity leave which meant she missed the onset on the crisis ( lucky woman?) has good news and bad news about the IFS analysis.
Overall, they think the government is being around £20bn too optimistic in its forecasts for borrowing between now and 2013. That’s not nothing. But, as the IFS admits, it’s well within the margin of error for forecasts like these. The average forecasting error for borrowing one year in advance is around £15bn; for forecasting three years ahead it is £30bn. The Green Budget’s own forecasts for borrowing in 2007-8 were actually further off than the government’s (oddly enough, both were too pessimistic).

And on that staggering level of public debt.

Finally, the IFS brings the news that we taxpayers will be paying for the credit crunch for a generation. It reckons that debt will not fall back to the government’s old ceiling of 40% of GDP until 2031… The good news is that the Treasury isn’t expecting that debt to cost us very much. If interest rates stay low, debt servicing as a share of GDP will be lower than in the mid-90s or early 80s. The bad news is that if interest rates go back up to more normal levels, debt will once again be on an ultimately explosive path.

Sadly, I have to end with gloom about the course of public spending. At least we’re inured to that by now aren’t we?

Thanks to the recession, spending will soar this year and next, but between 2010 and 2015 the budget is going to tighten by 2.6% of GDP. Of that, only 0.25% of GDP is accounted for by higher taxes.

  • Dave

    I think I’d prefer to be your ship rather than this sinking row boat called Ireland. The one to watch in the UK economy is how resilient your manufacturing industry is. That latent beast now has the opportunity to roar as it has a pound to die for and that is the envy of those economies trapped in the Eurozone. Look at the movement of capital from the Republic to NI for an example of how attractive your devalued currency has made your goods: 500M in 9 months. If manufacturers think the currency will stay low for the next 3 or 4 years then they’ll make the investment in pushing up exports.

  • IMF forecasts tick along with metronomic regularity: how many of us check their subsequent accuracy? For example, last November the outlook for the UK was growth for 2008 at 1% (down from its earlier shot of 1.8%) and -0.1% for 2009 (down from +1.8%). Around the same time, the IMF was predicting average oil-prices for this year at $68 (down from a previous guess of $100): in real time, oil closed yesterday at $42 or so.

    This is Mystic Meg stuff, with as much value as a fortune cookie. Just because it’s got a fancy label, doesn’t make it Château Lafite.

  • Jean Baudrillard

    Dave: But surely the UK export market is heavily reliant on customers elsewhere having money?

    So no matter how weak the Pound is, over the next few years companies are not going to invest in plant (because they can’t get loans) and individuals are not going to buy things like new cars (because they’re afraid of losing their jobs).

    Am I right in saying that the spending in the border counties seems to be mostly on weekly household shopping and not big ticket items? (I’ve even noticed a major slacking off of southern cars heading into IKEA at weekends.) I think, increasingly, as the tanking economy in the Republic really hits home, people will have less and less money to spend up north.

    It’s almost like we’re still in the ‘phoney war’ stage of this downtown… The long tedious grind to recovery is years off.

  • Harry Flashman

    I enjoyed David Smith’s demolition of Rogers’ analysis of Sterling in the Sunday Times:

    “[i]Rogers has probably taken enough punishment but, apart from the fact that it is nonsense – the world’s fourth-largest reserve currency isn’t finished – and puzzlement that anybody gives him publicity, I found it mildly reassuring. He said much the same about the dollar in April, since when its average value has risen 12%.

    Last June he said: “The bull market for oil has many years to go before it peters out.” We know what happened next. He was speaking from Singapore, where he has moved to see the Asian miracle at first hand, and where the economy is officially expected to shrink 5% this year.[/i]”

  • Alan

    Goodness, someone else has noticed the southern traffic in IKEA ! (I’ve been practically living there for the past few weeks – and have saw cuts and screwdriver’s elbow to prove it.) I suppose they have to have time to put their purchases together.

    Another secular weather vane sits just outside my office window. Where once there were one or two coaches a day from the Republic sitting parked. There are now at least eight, and others circling eager for spaces.

  • Mack

    Harry Flashman

    Jim Rogers is an successful investor – an order of magnitude more succesful than David Smith (or either of us). A number of points

    1. He’s not a short term trader – he invests on long term secular trends.

    2. He holds that the dollar is in long term decline – ditto for Sterling. The West is in relative decline, wrt The East (in particular China). Given the sheer amount of dollar reserves held by China and Japan, given the ballooning government debts, given that the Federal Reserve and Bank of England are now printing money at a furious clip – do you agree or disagree?

    Incidentally the dollar is down heavily against the Yen since he made that statement – the Yen is a currency he recommended buying – not Sterling or the Euro!

    3. He has stated that we are in a period of deleveraging / forced selling and this is temporarily positive for the dollar and negative for the short term commodotity prices. However commodity production is currently being hit (as well as demand destruction), this is bullish for commodity prices once demand returns. Given that there are long lead times in ramping up commodity production – do you agree or disagree?

    He has said we are still in a long term secular commodity bull. He said in his book “Hot Commodities” that during this bull market there will be major falls in the prices of commodities.

    Jim Rogers may turn out to be wrong about all of this, but to dismiss him out of hand on the basis of short-term trends, when he himself describes himself as the “world’s worst short term trader” is just intellectually lazy. It indicates the analyst hasn’t even bothered to research the character he attempts to assinate!

  • Mack

    Harry – I should also point out, as I follow a lot of his analyses (he is at a minimum entertaining), that he was saying he would not buy energy during the summer as it was approaching all time highs.

  • Harry Flashman

    So it’s sell Dollars and buy Chinese RMB is it?

    Hmmmm, you’ll forgive me if I don’t put my life savings into that particular pot just yet.

    See all those massive gaping holes in the accounts of British, American and European banks that we’re suddenly discovering? Well multiply that by a factor of ten to get an idea of what the Chinese and other Asian bank books must look like right now.

    As I recall in the 1980’s we were all assured that the Japanese and their banks were going to be buying and selling us in the West by this stage so fiendishly clever they were, and those magnificent Asian “tigers” wouldn’t be far behind them.

    Remind me, how did that work out?

  • Mack

    Harry –

    As I recall Japan became the second biggest economy in the world. If you were an investor who played it right, there were fortunes to be made. By the way in 1949 $1 bought 390 Yen, today it buys it 89.

    If he’s right on China, and even he says that there are many problems the Chinese need to surmount, then that may be a pretty good investment.

    Anyway, there is little point in the British getting upset because an investor doesn’t see their country as an attractive investment – Rogers never liked Ireland either. I still listen to what he has to say & occasionally what he says makes a lot of makes sense. If you think he is wrong, just buy Sterling 😉

    In a country with approx. €400 billion p.a. exports, where peak oil production (1999) at $40 a barrel would amount to annual crude production worth $80 billion and countless more billions generated by the City and Oil related services – I happen to think he may have a point. It is just highly unlikely that Britain will be able to increase economic activity from manufacturing that has been in almost terminal decline up until now, and pop music (as some have suggested) to offset the decline from those key activities. Also the decline in Oil production, will be steep (logicaly, the easy to extract stuff get’s extracted first, from here on in everything gets progressively harder and more expensive).

    Incidentally Nicholas Nassem Taleb made a much more damaging (and intellectually honest) attack on Jim Rogers investment understanding wrt to stock options strategies a number of years ago. But the Taleb operates in a manner counter to human-nature that most would find painfully uncomfortable.

  • Harry Flashman

    I have no intention of buying any more Sterling given that 90% of my assets are already denominated in that currency but I merely wish to add a wee note of caution for all those people who believe that suddenly China is the new best thing.

    I haven’t the slightest doubt that the world will undergo a rebalancing and much of the wealth now held in the West will move to Asia (I am currently involved in doing that very thing) but this is due more to simple demographics (ie Asians are having babies and Europeans aren’t) than any marvelously clever business plan by Asian leaders.

    I live in Asia, from my office window I can see no fewer than five office blocks that have sprung up over the past two years, every one of them has a bank name crowning it, including one by the Chinese ICBC bank. Not for one split second do I believe those towers will ever attain full occupancy nor do I believe that the accounts those banks are currently publishing bear any relation whatsoever to their actual, real balances. Like I say, I saw it all before with Japan, it is going to be precisely the same with the Chinese banks. Mark my words, there will be tears before bedtime.

    As regards Japan, I admire their progress since 1945 but the fact remains that demographics beat economics every time. Japan like Russia and much of Europe is in a death spiral; if you don’t want to make babies, well your country won’t be making much of anything in thirty years time.

  • It makes you feel better to know others are not having it great either, though obviously more in a ‘we’re all in the same boat’ sense rather than a sneeringly satisfied way.

  • Dave

    “Dave: But surely the UK export market is heavily reliant on customers elsewhere having money?”

    This is an invalid argument. It is mainly Europhiles who trot it out to counter the valid argument that a high Euro retards exports (and I am not claiming that you are a Europhile).

    It is true that other countries are importing less than a year ago, but it is not true that they have stopped importing. It may be a smaller pie, but it is still a big enough pie to feed you for a year with just a tiny slice of it. Since you could never have eaten all of the pie, it matters not if it is smaller. (If you don’t like pie or are on a diet, choose another analogy).

    UK exports are now 30% cheaper than they were a year ago. That is a huge advantage to offer in a global market that is forced by a contracting money supply to become more price-conscious.

    Business never stops; it merely changes speed. Therefore, even in recessions, people still become very rich.

    Whether or not manufacturers act to take full advantage of the low currency by investing in production (or just enjoy the boost in profits from existing exports) depends on how long they think the currency advantage will last, not on regarding it as a basis for a sustainable growth (since it fluctuates and therefore by definition isn’t) but they will realise that they now have a huge advantage to sell more goods more competitively than they had a year ago and the smarter ones will take full advantage of that.

  • Dave

    “It makes you feel better to know others are not having it great either, though obviously more in a ‘we’re all in the same boat’ sense rather than a sneeringly satisfied way.”

    Yup, but Gordon is blowing holes in his ship from stern to bow unwittingly, whereas I suspect that our quislings are deliberately scuttling our rudderless boat.

  • Dave @ 09:28 PM prompted me to a thought. I know it’s well below the level of debate above, and it’s even a mean-spirited and trivial point. However, that’s never stopped me in the past.

    Am I alone in noticing that the constant background whine of the roads lobby has been quelled of late?

    Could that be because the balance of road-haulage trade has shifted? For example, the price of diesel in the UK is now (on average) less than in Germany, Italy, Scandinavia, Switzerland and Slovakia. It is pretty well comparable to pump prices in France and the Netherlands. The differential for unleaded petrol works even more in favour of the UK. All those figures are lifted from the AA Roadwatch site.

    Moreover, there’s no general motorway supplement in the UK.

    I guess that when the on-costs for transport in the RoI are added in, it cancels out the differential between north and south as well.

  • Greenflag

    Dave ,

    ‘Whether or not manufacturers act to take full advantage of the low currency by investing in production (or just enjoy the boost in profits from existing exports) ‘

    The lesson of economic history in this regard for Britain is that they briefly enjoy the boost in profits and then do bugger all about improving their competiveness . We’ve seen the same repeated since at least the 1970’s several times .

    In any case manufacturing accounts for about 13% of Britain’s GDP and there is not going to be amjor revival of British manufacturing this side of Tibb’s Eve . It has been in decline for 50 years relative to the rest of the economy . Now that the ‘financial services sector ‘ future has been proved to have a rotten apple -where exactly will Britain find the ‘motor ‘ to rebuild it’s south eastern UK economy ???

    This is not by the way just directed at Britain. It’s a problem which is facing the entire western world in one shape or another.

  • Greenflag @ 10:05 PM:

    There isn’t going to be a single answer to that one: as we’ve discovered, putting all your Basques in one exit, and then shouting “Fire!” is a recipe for disaster. Whether or not the financial sector is effectively nationalised (and, from here, it’s looking like a surviving troika of HSBC, a cleaned-up Barclays, and the rest-rolled-up), banking and its off-shoots are going to be as tightly regulated in the UK — and the West generally — as they are in, say, Singapore.

    Equally, there is no purpose served by heaving spondulicks at industry, because India or wherever can now build Jaguars and Land Rovers or whatever cheaper than we can. Any heavy metal-bashing in the UK is going to be automated to survive. We’ve lost the capacity to engage in high-tech machinery. The exceptions seem to be the likes of aero-engineering and other specialist machinery — which is why Rolls-Royce and the Formula One teams are being discreetly resourced. The same is true for stuff like steel: only the specialist metallurgies are going to remain domestic.

    So, what’s left? Well, over a time-span of a couple of decades three come to mind:

    Pharmaceuticals, obviously. That’s why we’ve been chucking money at bio-tech and stem-cell research. Again, high cost, high skills, low employment.

    There room for energy generation. We’ve acquired the first-generation wind-power technology from Denmark. Now we need to exploit and sophisticate that. Dam the estuaries and go tidal as well. Pick up the threads of nuclear. Then sell the expertise to lesser breeds without the Law.

    Either of those two could provide charming opportunities now hidden by magic casements, opening on the foam of perilous seas, in faery lands forlorn.

    The other Great White Hope must be telecomms, which is behind today’s spiel about broad-banding Britain. In retrospect, I guess history will see the privatising of BT as the great mistake. Not necessarily because of the ownership, but the way the Thatcherites hobbled BT, that rivals would emerge to break the monopoly. In retrospect, only the monolith of BT could have delivered the fibre-optic cables and microwave links that would have got us to network UK already. Pornography financed the present internet. On-demand Coronation Street (and worse) could be doing the same for Net 2.0. Since the bulk of the UK population is so nicely concentrated, it’s only the later stages, taking the resources to the rustics, that’ll cost big.

    All of this suggests to me that, provided the Banks are fixed (and the rustling in the financial undergrowth is beginning to suggest that a whit of confidence is creeping back), the next stage is the odd Grand Projet on the French model, preferably omething to soak up semi-skilled employment. HS2 may yet happen (both main Parties are making approving noises). A national broadband would also fit that bill. The Severn barrage? What’s left after London 2012?

    So long as some idiot doesn’t sell us a Concorde programme or the like, it could still work.

  • Harry Flashman

    “Pornography financed the present internet”

    Completely and entirely off the subject and with apologies to the thread but that comment brought to mind an interesting story I was once told by a man in a pub (of course), readers of a gentle disposition and children might like to leave the room at this point.

    Anyway this bloke in a bar was explaining to me that in Victorian era Britain when gentlemen would be out enjoying the convivial pleasures of clubland their good lady wives would be at home looking for some shall we say stimulation. This was provided by calling a doctor to treat the lady’s “hysteria” (from the Latin word for womb) who would visit the patient in her bedchamber and relieve her of her symptoms by means of a discreet massage.

    Anyhoo later in the century there came the advent of electric discreet massagers to provide ladies with the necessary treatment without the necessity of calling a doctor. This development is believed to have been responsible for the initial surge[sic] in the demand for domestic electrification. Thus the massive societal change brought about by electricity was initially driven by the need for self-satisfaction of Victorian ladies.

    Now when this tale was recounted to me I naturally snorted in derision at such a ludicrous idea, my raconteur looked at me and asked me when I bought my first personal computer, I told him about ten years previously, how much did I pay for it? Just short of a thousand pounds. So, he said, when you were a young single man in your twenties you spent the best part of a months wages to buy a pc. At precisely the same time all around the world, young single men just like you were doing the same thing thus ushering in the initial wave in the internet which has now so completely changed the world in which we live.

    What, he asked, was I doing on the computer at that time?

  • Mack

    UK exports are now 30% cheaper than they were a year ago. That is a huge advantage to offer in a global market that is forced by a contracting money supply to become more price-conscious.

    True. But for how long? UK wages and savings are now worth 30% less – they can purchase 30% less goods. Foreign currency debts are 30% higher, same currency debts are the same relative to incomes. British business face less pressure to reform & increase efficiencies etc.
    Input costs are now 30% higher. If the problem is wages – then a flexible labour market (make it easy to hire and fire) will drive wages down without effecting savings.

    Having taking a 30% haircut on GDP, exports need to increase by more than that amount to make up the loss, otherwise the depreciation relative to other world currencies and commodoties represents a significant contraction.

    Incidentally, Russian economist Nikolai Kondratiev identified long wave business cycles (all he did was show empirically they existed, though others have postulated reasons why) during which economic growth is either faster or slower and during which commodity prices either rise or fall. The last downward leg of a Kondratiev wave is either coming to an end (or given the commodities boom) just ended.

    The reason I bring up Kondratiev, is that what appeared to work once (and I am sceptical about it’s long term benefit) during the 1990’s when commodity prices were in a long term secular bear (that is input prices were falling, so the cost of a falling currency was low) manifestly failed in the 1970s when resource prices were booming.

    You know, the phrase is “The mighty dollar”, not “The weaker dollar”..

  • Mack @ 10:49 AM:

    Russian economist Nikolai Kondratiev identified long wave business cycles (all he did was show empirically they existed, though others have postulated reasons why)

    Not precisely, Lord Copper.

    Kondratyev (or whatever phonetic version you prefer) did indeed ponder what was the cause of the Long Waves. He prefaced his original publication with an essay on Dynamic Equilibrium: this was deleted from later publications, and is now largely unknown. Because many insist on noticing the phases of the Long Cycle, they omit to notice Kondratyev’s essential thrust: the phases and the Long Cycle itself are parts of a longer process, the Dynamic Equilibrium.

    The base of the model is economic, but other considerations intrude: innovation, social conflict, geopolitics: all of these interact with, but none of these neatly harmonises with the economic cycle. Indeed, in one reading of the Long Cycle (I’ve seen it described as the “square wheel”) these four considerations are treated as the serial characteristic phases of the Long Cycle.

  • Harry Flashman

    “up to a point Lord Copper” surely.

  • Harry Flashman @ 02:03 PM:


    As it should be “Dumbarton” in my last on the other thread.

    No excuses.

  • Mack

    Malcom Redfellow

    I’m sceptical about any explaination for such phenomena, as they have to be based on unfalsifiable inductive reasoning.

    I’m happy enough to accept that long term up trends in commodity markets have occured, and may occur again. Devaluation heading into one is not neccessarily the best move in the world. Which is not to say in the UK’s case it isn’t a good move, but with Dave we’re always debating Ireland’s membership of the Euro by proxy…

  • Greenflag

    malcom redfellow,

    ‘There isn’t going to be a single answer to that one’

    I did’nt think there was 🙂

    The Dutch propelled themselves into the lead in economic power in the 17th century by means of ‘wind power ‘ . Britain took up the lead in the 18th and 19th centuries by means of ‘coal ‘ power and the Americans in the 20th century by means of ‘oil ‘ power . In all of the above cases early access and exploitation of the ‘power’ resource gave these states the know how and the advantage to broaden their economies, feeding off the power resource – the Dutch with mass irrigation and trade the British with steam engines,allied engineering and textiles and the Americans with the ‘Auto ‘.

    It’s hard to imagine what the major economic spin offs would be in todays world for any economy developing cost affective applications of tidal , solar or wind power technologies . There will of course be some . But I can’t see such spin offs doing the same kind of mass mopping up of labour as say what happened in the Industrial revolution era or later with the American ‘auto ‘ economy ?

    I saw a recent documentary on tidal power iirc it was off the Scottish coast and another smaller one was in Strangford Lough , Co Down . I have not had time to read up on either’s practical viability and cost effectiveness longer term but anything which lessens local reliance on fossil fuels has to be good .

    As to the span of a couple of decades to achieve a turn around to a new world order self sustaining ‘economy ?’ ?

    No doubt it will take time . But will ‘democracy’ as we know it survive the ‘interregnum’ ? and in particularif it’s a very protracted one . It’s in that kind of scenario that I see what’s called the free market, being pegged back not out of any economic or moral principle but to prevent societal breakdown and chaos .

    This ‘crisis’ of world capitalism was a long time in coming and it’s arrival at a point in history in which the larger new emerging economies such as China , India , Russia and Brazil and others does not bode well for international political stability . It’s this context Obama’s election and initial performance will have steadied some nerves .

    If we any more economic tidal waves of the sort we’ve been having the population at large may start wishing for just an ordinary ‘tsunami ‘ as light relief ;?