The British economy needs kid glove treatment
The collapse in UK output seems to have run its course and activity is now stabilising, but what sort of recovery can we expect?
Recent evidence on the economy has been mixed.
On the positive side, the latest KPMG/REC Report on Jobs found that permanent and temporary staff appointments rose in August for the first time in 17 months, while the number of vacancies declined but at a slower pace. On the other hand, the KPMG/BRC Retail Sales Monitor showed that August was a weaker month on the High Street, with like-for-like sales down 0.1 per cent on the same period last year – reversing an earlier improvement. Meanwhile, according to official figures, manufacturing production in July jumped by 0.9 per cent.
In fact, these apparently contradictory indicators give a flavour of the likely shape of the recovery. After a long period of unbalanced, consumer-led growth, the economy is in for a re-balancing as the debt-laden personal sector repairs its balance sheet and takes a back seat – so spending in the shops is unlikely to go romping away again.
In contrast, manufacturing should ultimately benefit from the weaker pound and a recovering global economy. The labour market is a lagging indicator and unemployment is expected to continue to rise, but private sector job-losses are past their peak. Even though employment will continue to contract in some areas, prospects are improving in others.
Nevertheless, we are not out of the woods yet. How sustainable the recovery proves to be depends on three main factors.
• First, the speed with which the personal sector reduces its debt and increases savings. Too abrupt an adjustment would precipitate another down-leg to the recession.
• Second, how quickly the authorities withdraw the various stimulus measures and start to tighten policy again. More generally, whoever wins next year’s election will be looking to tighten fiscal policy by cutting spending, and probably raising taxes too, to tackle the burgeoning government deficit. The trick will be to wait until the recovery has gained sufficient momentum to withstand the withdrawal of the current fiscal boost and the reversal of the current loose monetary stance.
• And third, how quickly bank lending recovers. Clearly it would be a mistake to return to the lax lending policies which contributed to the boom and bust, but equally a continued contraction in lending to the (non-financial) private sector is incompatible with a sustained economic recovery.
We can take encouragement from the fact that the authorities have done the right things so far – stepping in to stabilise the financial system, boosting the economy via fiscal policy and reducing interest rates to near zero and embarking on a programme of quantitative easing – but the patient will remain in intensive care for a while yet.
Andrew Smith is the chief economist at KPMG