Britain's economy
How bad is it?
Sep 4th 2008
From The Economist print edition
Not as wretched as the doomsters claim; but reviving the
British economy will take time
"THE nine most terrifying words in
the English language", Ronald
Reagan is held to have said, "are:
`I'm from the government and I'm
here to help.'" If only Gordon
Brown had listened. The prime
minister's plan, revealed on
September 2nd, to keep Britain's
troubled 4 trillion ($7 trillion)
housing market "moving forward"
by advancing some 1.6 billionworth
of help to first-time buyers,
purchasers of modest properties and homeowners struggling to meet their
mortgage payments was never going to be more than cosmetic. In the
event it mixed a few sensible ideas (faster help for those whose banks
threaten to repossess their houses) with a few dotty ones (luring first-time
buyers into a falling market). But the overall effect was minimal.
The details of Mr Brown's housing plans are the least of his problems. A
few days before their announcement, his chancellor of the exchequer,
Alistair Darling, hijacked the headlines for a week when he said that
economic times were the worst in 60 years. Mr Darling gamely maintained
later that he had been talking about prospects for the world, not for Britain
in particular. But before that dog had even tried to hunt, the OECD, a richcountry
think-tank, released a widely reported assessment of the outlook
for the worlďs seven biggest economies. Britain, it reckons, is the only one
facing recession (two quarters of negative growth) this year. This called
into question Mr Brown's oft-repeated claim that economic woes are
global, and well-managed Britain is better placed than most to deal with
them.
That the British economy has serious problems is pretty obvious. Britain's
housing bubble was more dangerously inflated than most countries'; its
households are more indebted; financial services account for a bigger
share of its economy; and its government, thanks in large part to Mr
Brown, spent with both hands during long years of unremitting economic
growth, leaving little scope for fiscal fine-tuning now.
So the bad news is clustering thick and fast. The economy stagnated in the
three months to June. Gloomy forecasts come not just from think-tanks:
the governor of the Bank of England says that growth will be flat for a
year. Sterling has lost 15% of its trade-weighted value over the past year,
and 5% over the past month. Consumer-price inflation is widely expected
to hit 5% this year (more than twice its official target), though the sharp
drop in oil prices may blunt that spike. Unemployment is edging up. And
the housing market is collapsing: prices have fallen by 11% in a year, and
the number of new mortgage approvals in July was 71% lower than the
same month last year.
The picture looks even more dismal compared with the United States. The
American economy is growing again, the dollar is bouncing back and some
people even reckon the housing crisis has touched bottom. Whether this is
mainly owing to a $180 billion fiscal handout (whose effects may fade),
America's inexhaustible energy and now-flourishing exports, or the simple
fact that it stumbled earlier is a matter of debate. Whatever the answer,
Britain's prospects appear grim in comparison.
But the worst outlook in six decades? Nonsense. Britain is not going to
return to the rationing of the 1940s, the three-day working week and
25%-plus inflation of the 1970s, or the 3m unemployed of the early 1980s.
Nor does Britain look so bad in comparison with the neighbours. The
somewhat flaky OECD report was sexed up in the retelling; and, while
Britain is teetering on the brink of recession, the euro zone is already
shrinking.
So Mr Brown is right to point out not only that others share Britain's
suffering but also that there is a resilience to its economy. Thaťs partly
because Britain's labour and product markets are more flexible than many
of its neighbours': the labour market has a safety valve in the form of the
1m workers who arrived from central and eastern Europe over the past
four years and are now beginning to go home. And it is also because high
energy prices, while hurting consumers, boost government revenues
thanks to the remnants of North Sea oil and gas production. Whaťs more,
even though Mr Brown has played fast and loose with the rules for fiscal
prudence he put in place, they nevertheless make it harder for him to
spend as wildly as some of his predecessors did on finding themselves in a
fix.
But Mr Brown, an arch meddler, is wrong to suggest that the government
can or should make it all better. A certain amount of fiscal stimulus is
working its way through the system now: some 2.7 billion will be paid
next month to taxpayers who lost out when the 10% tax band was
abolished from April; and benefits rise and tax receipts fall automatically
when the economy turns down. But setting out to spend significantly more
or tax significantly less would be risky, even if the state of the public
finances permitted it. A big fiscal-stimulus package would tend to push
prices up and thus make it hard for the Bank of England to reduce interest
rates. The Bank kept its base rate at 5% this week, but it will be looking to
cut before long.
The truth is that Britain is simply going to have to take it on the chin for a
while. There is no easy fix, no return to the days of plucking credit cards
and mortgages off trees. Sterling was overvalued; it is now falling; in time
exports will respond (perhaps quite a long time, as Britain's main export
market is sluggish Europe). Housing was grotesquely overpriced; prices
are slumping; in time they will reach a level at which poorer young Britons
can buy themselves a home. These are painful but necessary
realignments.
The principal danger now is not economic but political. Sterling fell on
September 1st because Mr Darling revealed not new truths about the
economy but divisions and indecisiveness at the heart of government.
Twenty points behind in the opinion polls, Mr Brown is understandably
searching for some goodies to hand out. Fortunately, the ones he produced
this week will make little difference. When he finds some that do, start
worrying.