The Olympics provided welcome relief from unsettling economic news, but away from the Games barely an economic signal has been heartening.
News this week may prove better. The latest inflation figures are due out today, the unemployment rate on Wednesday and retail sales figures on Thursday when we might see first evidence of an ‘Olympic effect’.
However, Bank of England governor Mervyn King doused hopes of the Olympics having a significant impact on Sunday when he wrote: “The Games cannot alter the economic situation we face.”
The situation is that the UK is in a deeper recession than the euro zone despite the euro crisis and the latter is no nearer resolution despite euphoria at remarks by the head of the European Central Bank (ECB), Mario Draghi, at the start of the month.
Draghi’s declaration that “The ECB is ready to do whatever it takes” was interpreted as meaning the Central Bank would write an open cheque to solve the debt crisis. But Draghi’s words quickly morphed into “[The ECB] may undertake operations of a size adequate to reach its objective”, which is not quite the same.
The problem is the financial markets and major banks want the ECB to guarantee unlimited funds to bail-out Spain and Italy, not just Greece. This depends on Germany which refuses to sanction such a guarantee. It will take an even deeper crisis to force Germany to give way, and that is what the markets may engineer.
Unfortunately, this is not the sole problem. The rescues come at the price of increasing austerity which produces a downward spiral. Each bail-out increases the potential losses if a country exits the euro – in the Greek case, these are now put at euro750 billion. A failed Spanish rescue would dwarf this.
Worse, the problems are not confined to Europe. The Brookings Institution, a US economic institute, noted this month: “The engines of world growth are running out of steam while the trailing wagons are going off the rails.”
The US economy is approaching a ‘fiscal cliff’ (multiple tax rises in January) as growth in its manufacturing slows to its weakest in three years. Chinese growth is also slowing. India has stalled (and has struggled to keep the lights on).
Add in fears of a global food crisis, with prices of two of the world’s four staple crops – corn and soya bean – at record highs because of the US drought and you can understand the reasoning behind the Financial Times’ (FT) view of the global outlook on Monday: “The world is halfway through a lost decade . . . Economists are starting to accept the Great Recession has permanently damaged growth.”
What does it mean for the UK? The FT reported (August 2): “The bond market thinks Britain is going to be terrible for a long time. All hopes are pinned on the ECB.”
The most-recent GDP figures confirmed the dire state of the UK economy. A provisional second-quarter decline of 0.7% was far worse than the -0.2% economists predicted.
Office for National Statistics (ONS) figures showed an across-the-board drop in construction, production and services. This followed a 0.3% decline in January-March and 0.4% fall in the last quarter of 2012.
The double bank holiday in June was estimated to account for 0.5% of the decline. But in the words of Citigroup economist Michael Saunders: “The weakness cannot be wholly attributed to special factors.”
The Olympics were forecast to add 0.5% to GDP in the third quarter, but it would take a further 0.5% to take the economy back to its January starting point.
The Bank of England monetary policy committee (MPC) meeting in July recorded falling consumer spending, revised down estimates of business investment and revised up “significantly” its view of government spending (supposed to be reducing).
It noted growth in lending to households “had changed little since mid-2009” and “loans to non-financial businesses had fallen 3% over the 12 months to May”, adding: “Interest rates on mortgages and loans to small and medium-sized companies have risen.”
The squeeze on household income continues despite falling inflation, with teh committee describing annual pay rises as “subdued” and the latest settlements as “very weak”.
The longer-term outlook is hardly better. Prime Minister David Cameron, in an interview in mid-July, hinted at austerity continuing to 2020.Cabinet secretary Sir Jeremy Heywood told the Institute of Government: “We are 25% through fiscal adjustment. Spending cuts could last seven, eight, 10 years.”
For travel the euro exchange rate provides some cheer, as does the fact that unemployment remains surprisingly low in the circumstances. But the oil price was back at $115 a barrel at close on Monday.
So FT columnist John Authers’ warning about the post-Olympics outlook may be uncomfortably close to the mark: “Seven months of market turmoil were followed by two weeks of calm for the Beijing Olympics [in 2008] . . . Days after the Games ended came the deluge. There is ample risk of another September deluge.”