I caused a bunch of chief executives to choke on their antipasti at a dinner this week when I insisted that there were definite signs of economic green shoots. “We don’t see anything and we don’t expect to any time soon,” was the chorus.
Yet, here we have industrial production rising in April, after more than a year of declines, and the National Institute for Economic and Social Research suggesting that the economy as a whole has already started growing again.
Who is right? My gloomy chief executives or the cold statistics? The answer is that it all depends on where you are standing. The protesting diners were mainly in retailing, leisure and building supplies. The retailers said that things were at best bumping along the bottom if you ignored the impact of the good weather in April and May. The boss of a big leisure company said that trading had actually got worse in recent weeks, which he put down to fear of unemployment. As for building supplies . . . don’t ask. In contrast, the head of a company that makes plumbing fittings said that sales had risen strongly in recent weeks.
The explanation for this and the rise in industrial production reported yesterday may all be down to stocks.
As business went into a collective panic at the end of last year, companies stopped ordering from their suppliers and tried to meet demand from their existing stocks of products. But you can only run down stocks for so long. At some point, even if end demand is subdued, you have to start ordering again.
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Some of the upturn in industrial production reflects a rise in exports, helped by the fall in sterling. But much is thought to stem from the end of destocking, rather than an upturn in final demand.
The turning point has come more quickly than many economists forecast, just as the downturn was more abrupt than many expected. This may be due to the spread of computerisation and the generally lower level of stocks throughout supply chains these days, which means that changes in demand ripple across the economy more rapidly.
The institute’s projections, which have been pretty accurate in the past, suggest that the economy has already enjoyed a couple of months of modest growth. If this continues, the recession will shortly be declared over.
Not that it will feel that good, because unemployment and company failures will continue to rise. And the big worry is that the British patient, after a feeble recovery, could suffer a relapse.
If the upturn we are seeing now is in large part because of restocking, there will be a spike in orders which will inevitably fall back again. How far they fall back depends largely on the strength of consumer demand. And there the picture is still pretty gloomy. Consumers remain shackled by heavy debts, battered by the housing slump, fearful of unemployment and hampered by banks still reluctant to lend.
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Public spending provides no alternative, since the massive burden of government borrowing is about to force severe cutbacks.
The industrial production figures show some signs of the hoped-for rebalancing of the economy away from its dependence on the indebted consumer.
But without a big easing of credit or a strong rebound in export demand, the recovery is likely to be anaemic, if it is sustained at all.