A cynic will tell you that the economy depends about as much on economists and financial pundits as the weather does on weather forecasters. Still, even the sternest pessimist might justifiably take heart from the latest pronouncements from economists and the Bank of England’s Governor, Mervyn King. It is true that, when they are meshed with the latest data on unemployment, these forecasts paint a mixed and still painful picture of Britain’s economic prospects. Nonetheless, it is the most encouraging picture we have gazed upon for quite some while.
The Bank of England is now predicting that the economy, having returned to growth by the beginning of next year, will expand by about 3.75 per cent by the end of 2011. Not only is this faster than it was predicting quite recently, it’s also not so long ago that, if you’d suggested that Britain might enjoy so brisk a recovery, people would have sniggered at your naivety.
Not that Mr King is celebrating just yet. He cautioned yesterday that Britain had only just started on the road to recovery, and that output is unlikely to return to its pre-crisis levels for some time. But he also said he was open-minded about pumping more new money into the economy, having only recently fed a further £25 billion into its programme of quantitative easing. With the spare capacity still swishing around the economy like a loose skirt, the threat of a resurgence in inflation any time soon seems remote. This should keep interest rates low for a while yet. This may be a boon to borrowers and a blow to savers, but it’s a measure of the weakness of demand.
Worse, bleak patches remain. While the rise in unemployment is slowing, the number of young people out of work is swelling: one in five is now without a job. Moreover, blue-collar workers continue to bear the brunt of the recession. The jobless rate in the West Midlands is the highest in the UK. The Government must address more aggressively the plight of those young people who have never had jobs and those manufacturing workers who once thought they had jobs for life.
What we are now able to see much more clearly, though, is the shape of this recession. Having witnessed the steepness of the decline, and the scale of the trough, we are starting to discern something of the shape of the recovery. The signs are that it will be very slow, and very shallow.
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Nobody wins prizes for being the Pangloss who calls the end of a recession too precipitately. And it is true that — unlike Britain — the United States, Japan and Germany are already out of recession. Also that Britain’s economic horizon is still not as heartening as that facing Russia or China. Norway, Israel and Australia, too, are recovering fast enough to have had to raise interest rates to choke off any inflationary threat.
Isaac Bashevis Singer said that if you keep on saying things are going to be bad, you have a good chance of being a prophet. There has been no shortage of would-be prophets. But they are beginning to bite their tongue. After a long economic winter, Britain senses spring’s approach. Stock markets are giddy; takeover activity is bubbling; Warren Buffett is investing. Emerging markets are vibrant. A fall in sterling has helped exports.
But is also worth keeping in mind that, historically, recessions triggered by financial crises are not only deeper, and last longer, they also tend to be followed by shallower recoveries. Taming the fiscal deficit will challenge whichever party wins power next year. Confidence will be crucial, and confidence is fragile. Just how fragile was shown this week when all it took was a remark by a ratings agency, citing Britain as the major economy most at risk of losing its triple-A rating, to knock sterling off its three-month high against the dollar. It certainly won’t be the last instance of what Singer might have called the prophet motive.