At the Institute of Economic Affairs annual state of the economy gathering held at the Institute of Directors yesterday, the great and good of the economics world held forth with their views.
What was quite noticeable is that there seemed to be a different opinion for each speaker. But one thing did come across. It seems you can divide the economic world into those who think the current economic crisis is just a nasty recession and will end in a few quarters’ time, as all recessions do, and those who see it as something altogether more nasty.
There were relative bulls at the gathering, and outright bears. The thing is, though, there is more to the message from the bears than a tale of woe. They outline a way forward. By contrast, the bulls, through the way they bury their heads in the sand, risk making things worse. At least they do if their ideas are adopted.
Andrew Sentance, a member of the Bank of England Monetary Policy Committee, got the ball rolling at the conference. But his message came with a positive twist.
Sure, he made all the normal comments about the UK being in deep recession. But added: “I would like to try and put the current recession in its historical context… it is nearly two decades since the last UK recession, and so recollections of that episode are quite remote. The two recessions in the mid-1970s and early 1980s are even more distant memories.”
Mr Sentance rather implied that because it has been such a long time since the last recession, the seriousness of this downturn is being exaggerated by some.
|Growth peak||Period of falling GDP||Drop in output during recession||Pre-recession GDP level recovered|
|Mid ‘70s||1973 Q1||1973 Q3 – 1975 Q3||-3.32||1976Q4|
|Early –‘80s||1979 Q2||1980 Q1- 1091 Q1||-4.61||1983 Q1|
|Early- 90s||1988 Q1||1990 Q3 – 1991 Q3||-2.54||1993 Q3|
|Late 2000s||2007 Q3||2008 Q3 – ?||?||?|
All of a sudden, the recession looks like any other. One can easily conclude from the above data that it is just a matter of time before the UK recovers.
Mr Sentance said: “It is too early yet for us to assess how far this relaxation in monetary policy is providing support for consumer spending and other elements of private sector demand. But by the middle of the year, this should be more apparent and some of the current mood of consumer pessimism associated with the onset of recession may have dissipated. Together with the boost to household disposable income from lower energy and other commodity prices, this should help support a more general turnaround in the economy as we move into the second half.”
He said that back in the 1970s…“British industry was then being held back by a set of problems which became known as the “British disease” – low productivity, bad industrial relations and lack of non-price competitiveness… The modern face of British manufacturing is based on investment in high-tech capital equipment, innovation and skills and benefits from a much more flexible labour market than we had in the 1970s and 1980s. Until recently, the main concern about the ability of these firms to expand and deliver a bigger contribution to the UK economy was lack of capacity. But that is not the issue now, with 70 per cent of manufacturing firms working below capacity according to the January 2009 CBI Industrial Trends Survey. Over a period of time, a competitive pound puts British manufacturing in a much better position to win new markets at home and abroad – mitigating the negative impact of the recent sharp downturn in global demand.”
So that’s all rather good then. To summarise: recessions are things that always happen. This is just another recession. Unlike in the past, British manufacturing is efficient, and the cheap pound will enable able us to export our way forward.
You can see why the Bank of England reckons 2010 will probably see a strong recovery.
It is just that there is a problem with all that, and Roger Bootle, the next speaker, pointed this out.
The truth is, there is no historical precedent for this slowdown. Today, the global economy is interdependent in a way that it has never been before. Sure, the cheaper pound may enable Britain to export her way out of trouble, but, don’t forget, it is exporting countries, Japan, Germany and China, that are seeing exports crash.
The economy is made up of humans, and humans are not perfect. Above all, we tend to overreact. So capitalism has made errors, now some politicians are calling for an end to Anglo-Saxon style capitalism, and a softer, cuddlier form of capitalism, in which markets are held back, inefficient industries are subsidised, and the barriers of protectionism are erected.
If you believe this crisis came out of nowhere, you surely believe it is only a matter of time before it goes back to nowhere.
But if you believe the true cause of this crisis was global imbalances, with some countries building up massive balance of payments surpluses and consuming much less than they produced, while other countries built up massive balance of payments deficits spending more than they produced, then the fix will not occur automatically.
In a way, globalisation is to blame for this crisis. But that is not the same thing as saying you are against globalisation. It caused this crisis, because the extra wealth that globalisation created led to imbalances. The solution to this crisis lies solely in global, synchronized policy. And those who insist this crisis is just like any other, and will end on its own after a certain amount of time has elapsed, are doing us all no favours.
© Investment & Business News 2013