http://blogs.birminghampost.co.uk/business/

Economic Flat-lining: Time to Change Course?

By David Bailey on May 1, 11 05:57 PM in Economics


Leaving aside construction and energy, the argument goes, and last week's economic growth figures didn't look so bad, with manufacturing and services doing well. But with overall growth of just 0.5% barely making up for the equivalent fall in GDP in the last quarter of 2010, the stark fact remains that growth needs to be much higher if the government is to hit its own targets on reducing the deficit.

Put simply, if the economy doesn't grow quickly enough then enough tax receipts aren't generated and the deficit (and deficit-to-GDP ratio) doesn't come down fast enough. At this rate Chancellor Osborne seriously risks failing to hit his own targets.

The key problem is that the private sector simply isn't investing enough to drive a self-sustaining recovery and the 'rebalancing' that the government talks of. One wonders if we've caught a dose of the 'Japanese disease'. Over twenty years ago the Japanese bubble burst, and firms and households changed their behavior overnight. Instead of firms maximising profits (if that's what they ever did) and consumers welfare, both switched to minimising debts. Keynes' famous 'animal spirits' effectively packed up and went on strike.

Spending and investment fell and with the Japanese economy flatlining, the government had to step in as spender of the last resort. But a key mistake was turning off that fiscal stimulus too soon in the early 1990s, with the effect that the economy failed to ever take off. Japan's economy has flat-lined ever since - they call them the 'wasted decades'.

I'm not saying we're about to face such a long term crisis, but the fact that our economy has failed to grow -overall - for the last six months, is a pretty telling indication of the UK's current economic fragility.

In particular, we need to see the manufacturing revival continue along with much stronger services growth if the economy is going to avoid a long period of growth below trend, and with it rising unemployment. But the manufacturing revival may well slow without a supportive set of industrial policies to boost capacity and investment - something the government has failed to recognise properly so far (see my earlier blog here).

Many of us - Lib Dems included let's remember - warned during the last election against 'fiscal hysteria' and the risks of fiscal overkill - by that I mean cutting spending too quickly too deeply - in the context of major international uncertainties (slowing growth in the US, volatile oil prices and so on). The actual cuts are just about to start but the impact seems already to have been a serious denting of consumer confident so great that the economy is, well, flat-lining.

And in many ways the fiscal contraction just starting to hit us looks pretty badly thought-out. It is frontloaded, more reliant on expenditure cuts than tax increases, and the cuts in welfare benefits will impact especially on the poorest and hence their spending power.

But at least the weak growth figures should silence - for now at least - the interest rate hawks who have been in such a flap over inflation recently. This is no time to raise interest rates. The recovery is far weaker than the government expected and there is little need to raise rates when inflationary pressures are externally generated and have yet to become embedded in wage growth.

But therein lies the problem in that 'Plan B', if there ever was one, was that the Bank of England would give us another dollop of quantitative easing and a further depreciation of sterling so as to boost growth. But with inflation consistently over-target the Bank is not in a position to print more money. Plan B bit the dust.

Despite the fiscal hysteria whipped up by the government, the fact is that there was never a UK debt crisis like in Greece or Ireland. The UK (or more specifically England for much of this time) has not defaulted on its debt for some 600 years. And the UK is actually a big economy that issues debt in our own currency - sterling. That debt has a long average debt maturity, and we face no major issues over servicing it.

We need to remember that as a major economy we still enjoy quite a bit of room for manouevre over our fiscal policy. Of course, we need a credible plan to get the deficit down and need to recognise that - down the line - interest rates will have to go up (but not yet). The point is that we now need a 'Plan C', and this should mean a looser fiscal policy stance.

Indeed, scaling back and/or postponing some of the fiscal tightening could boost both short-term demand and the longer term prospects for growth. The latter in turn could ironically generate more tax receipts for the government and help bring the deficit-to-GDP ratio down. It's time to change plan; the alternative (sticking with Plan A) looks increasingly like it will lead to below par growth and with it rising unemployment.

As I said in the Birmingham Post back in March on the day of the Budget, this government will live or die by George Osborne's economic calculation which is essentially a five-year, one-parliament gamble to cut the deficit without killing off growth. So far at least, that gamble doesn't appear to be working. And after reading the government's 'Plan for Growth' cover-to-cover, I'm still struggling to see where the growth part actually is.

Professor David Bailey works at Coventry University Business School

Business authors

David Bailey

David Bailey - Professor of Industrial Strategy at the Aston Business School, Birmingham
My postings | David Bailey's RSS feed My feed

Stuart Pemble

Stuart Pemble - Construction Lawyer, Mills & Reeve
My postings | Stuart Pemble's RSS feed My feed

John Clancy

John Clancy - Birmingham City Councillor and director of mediafuturesalert.com and justliteracy.com
My postings | John Clancy's RSS feed My feed

John Samuels

John Samuels - Professor of Business Finance, Birmingham Business School
My postings | John Samuels's RSS feed My feed

Chris Tomlinson

Chris Tomlinson - Chris Tomlinson is the founder of social media and online PR agency Friend (frienddigital.com)
My postings | Chris Tomlinson's RSS feed My feed

Andrew Whitehead

Andrew Whitehead - Senior partner at law firm SGH Martineau, leading the firm's Energy & Climate Change practice.
My postings | Andrew Whitehead's RSS feed My feed

Keith Gabriel

Keith Gabriel - A Birmingham-based PR Account Manager
My postings | Keith Gabriel's RSS feed My feed

Beverley Nielsen

Beverley Nielsen - Lecturer, Design Management, at the Birmingham Institute of Art & Design, BCU
My postings  | Beverley Nielsen'a RSS feed My feed

Mike Loftus

Mike Loftus - Director of News from the Future Ltd. Writing on the trials of setting up your own business
My postings | Mike Loftus's RSS feed My feed

Richard Halstead

Richard Halstead - Midlands region director for EEF, the manufacturers organisation.
My postings | Richard Halstead's RSS feed My feed

Karl Edge

Karl Edge - partner at KPMG in Birmingham, specialising in automotive, manufacturing and house building sectors.
My postings | Karl Edge's RSS feed My feed

Peter Owen

Peter Owen - Managing director for construction firm Willmott Dixon Midlands.
My postings | Peter Owen's RSS feed My feed

Dr Steven McCabe

Dr Steven McCabe - director of research degrees for Birmingham City Business School.
My postings | Dr Steven McCabe's RSS feed My feed

Francis Greene

Francis Greene - Professor of Small Business and Entrepreneurship, at the University of Birmingham.
My postings

Alan Gilmour

Alan Gilmour - Director at Cogent Elliott, experienced in marketing, brand development and customer relationship management.
My postings

Paul Noon

Paul Noon - Paul Noon, OBE, West Midlands International Trade Director at UK Trade & Investment.
My postings

Latest Birmingham Post Lifestyle blog

Lifestyle Blog

Birmingham Post staff and guest bloggers from the midlands give you the lowdown on what's happening in your region and some musings on culture in the UK and beyond.

Keep up to date

Sponsored Links