The economic outlook appears brighter, says Ian Taylor. But it’s an odd kind of recovery we are having if that is what it is
The economic clouds lifted as summer finally arrived. Signs of recovery are not everywhere, but bad news is no longer prevalent.
In the words of a Treasury official, the mood has become “less urgent in terms of pessimism”.
The position of the UK economy is both better and worse than we thought.
It is better, in that we now know there was no double-dip recession (the economy merely stagnated).
It is worse, in that new data shows Britain suffered a deeper economic decline in 2008-09 than we believed. The fall in GDP is now put at 7.2%, not 6.3%. As a consequence the economy remains 3.9% smaller than in 2008.
The outbound tourism market largely reflects this reality. It shows remarkable resilience and signs of growth here and there, but no real recovery.
Official figures show outbound holiday departures for the first four months of this year down 1% on a year ago, 4% down on 2011 and 30% down on 2008.
GfK figures for summer 2013 bookings show the market about 2% down on volume into mid-June.
As for the outlook, UK household income continues to fall relative to inflation.
Disposable income per head in the first three months of this year was its lowest since 2003 and the quarter-on-quarter fall of 1.7% was the sharpest since 1987. (Bear in mind, disposable income rose in 2009 when the downturn was at its height.)
Wages adjusted for inflation are now about 9% below their peak.
The government spending review, announced last week, won’t improve the situation for public sector workers who face a 1% annual pay cap.
New Bank of England governor Mark Carney, who took over this week, will hope to improve things. Whether he can is debatable.
Carney is widely expected to take a more relaxed view of inflation than his predecessor. Indeed, it is argued he may seek to manage the exchange rate lower.
There is even a suggestion the pound could fall 10%-15%. That would be grossly unwelcome.
Deloitte head of travel Graham Pickett told last week’s Abta Travel Matters conference the pound could weaken against the dollar but strengthen against the euro, which would be better.
Figures this week will update our picture of the world economy. But we already know the eurozone suffered a torrid first quarter, with obvious repercussions for the UK.
There is a lull in the eurozone crisis but little sense of resolution. EU leaders have put plans for banking union on hold and failed to agree a formula for a bank rescue in the event of a repeat of the Cyprus crisis.
As Pickett said last week: “They have just kicked the can.”
Elsewhere, the US recovery has proved weaker than thought, with first-quarter growth revised down by a quarter.
China appears to have suffered a credit crunch – the Financial Times (FT) noting: “A stunning rise in the rates at which banks lend to each other.”
And none of the remaining Brics (Brazil, Russia, India) are in good shape. Brazil has been wracked by million-strong protests triggered by a rise in bus fares.
Russia is suffering from the global fall in commodity prices on which its growth has been based, and India no longer reports the growth rates which drew in foreign investors.
The FT identified two key developments: one, an end to the current phase of stabilisation following the financial crisis; two, the end of a decade of growth in emerging markets.
FT columnist John Authers noted of the latter: “The tide has shifted for emerging markets … The benign conditions of the past decade no longer apply.”
The first development came with the US Federal Reserve signalling an end to the ‘easy’ monetary policy (quantitative easing in the UK) which has fuelled the rise in global markets. Its imminent demise has brought back ‘turbulence’ on the markets.
Authers suggested: “It’s unclear whether the Fed believes the US economy is strong or fears … a bubble.”
The ending of this phase is unlikely to be pain free. An underlying worry is what happens to interest rates.
The Bank of England was sufficiently concerned last week to announce an inquiry into “the vulnerability of borrowers and financial institutions to sharp upward movements in long-term rates” given the risk of “an abrupt adjustment to financial market prices”.
The Bank warned “a significant cohort” of borrowers were likely to experience difficulties if rates rise before economic conditions improve.
It’s recovery Jim, but not as we know it.