Tweet
Unbalanced and unsustainable - this is the wrong kind of growth
A Scot has won at Wimbledon, the “Welsh” Lions have triumphed Down Under, an adopted Englishman leads the Tour de France, house prices are rising, the sun is shining, the economy is growing, God is in his Heaven and all’s right with the world.
It seems an article of faith that not until we have seen a Spanish-style meltdown in prices will Britain finally exorcise the evil of the last housing bubble Photo: Reuters
By Jeremy Warner
8:59PM BST 08 Jul 2013
230 Comments
The national mood is important in economics – too glum and it threatens a downward spiral in demand, but, if buoyant, it can be an equally powerful propellant. Right now, we seem to be in something of a sweet patch, with growing confidence that the worst of the financial and accompanying economic crisis may finally be behind us.
Scratch the surface, however, and an altogether more concerning picture emerges. Yes indeed, the economy is growing again, prompting a scramble among City economists to keep up with a fast-changing story.
One or two have raised their forecasts for this year to as high as 2pc, against just 0.6pc forecast by the Office for Budget Responsibility as recently as March, and even the naturally lagging consensus has shifted decisively back to around 1pc.
So can we all breathe a sigh of relief and get back to business as usual? Not so fast, for “business as usual” may be a large part of the problem.
All growth is welcome, but if there is such a thing as the wrong type of growth, the present recovery looks very much like it.
Related Articles
To the extent that there is a convincing recovery taking hold, it is driven by very much the same combination of easy money and excessive consumption, private as well as government, that we saw in the pre-crisis years. This new spate of growth looks just as unbalanced, and therefore unsustainable, as it was back then.
The economy is growing, but business investment remains at rock bottom, and despite a near 25pc devaluation in Britain’s trade weighted exchange rate since the crisis began, there is very little evidence of significant improvements in net trade either.
Recent data point to an upswing in manufacturing, but we’ve seen these mini-revivals before, and regrettably, the big picture is that consumption is still the main force keeping output alive, not production. The UK is getting the growth in demand, but it is not getting the growth in capacity to sustain it.
Worse, real wages are continuing to fall, even though we are spending more. As a result, the savings rate has once again fallen to perilously low levels.
Sir Mervyn King, former Governor of the Bank of England, has coined the term “the paradox of policy” to explain this phenomenon. The Bank of England is deliberately pursuing a policy that brings about the opposite in the short term of what it wants to achieve in the long run – it has been supporting spending with unprecedented quantities of loose money even though it knows that ultimately Britain must raise national savings substantially.
This approach might be regarded as merely delaying the inevitable, but it’s hard to see the alternatives; doing anything else would only have recreated in Britain the same depression and economic atrophy that afflicts the eurozone periphery. Britain is too indebted to be able to tolerate a rapid return to higher interest rates.
The key point about policy was recently articulated by Sir Mervyn in his valedictory speech: “The real challenge – on a global scale – is to rebalance the world economy so that very low interest rates are not required to exhort deficit countries to spend in order to absorb the surpluses elsewhere."
As Britain demonstrated after exiting the ERM, it is perfectly possible to have growth, rebalancing and fiscal consolidation all occurring coincidentally, but it requires rising demand in major trading partners. The eurozone crisis has snuffed out all hope of such a benign adjustment for the foreseeable future, leaving Britain again dependent on credit-fuelled domestic demand and whatever success it can achieve in neglected markets further afield.
What, if anything, can be done? Like a scratched record, the answer keeps on repeating itself – supply-side reform. But before exploring what might help, it’s worth killing off a particular canard – that attempting to revive the housing market will only create another bubble and therefore even more of the wrong sort of growth.
There has been a lot of this sort of commentary around since the Government announced its “Help to Buy” scheme in the March Budget. The Office for Budget Responsibility, the International Monetary Fund, Labour’s Jack Dromey, uncle Tom Cobley and all have condemned the scheme for fuelling prices while failing to boost supply.
And they are half right; in principle, it cannot be a good idea to use taxpayers’ money to subsidise property ownership. On the other hand, housing is a key part of the UK economy, transactions are still exceptionally low by historic standards, and prices have already seen quite an adjustment in real terms.
Even so, it seems an article of faith that not until we have seen a Spanish-style meltdown in prices will Britain finally exorcise the evil of the last housing bubble.
This is a bit like the argument that, because finance is supposedly the cause of so many of our recent problems, the UK would be a happier nation with a much smaller City. One thing is for sure; we would certainly be a much poorer one.
UK housing was not the cause of the financial crisis; in fact, UK mortgage lending has remained a haven of calm and safety for the banks throughout the storm.
As Ben Broadbent, a member of the Bank of England’s
Monetary Policy Committee, has pointed out, losses on overseas mortgage lending by UK banks have far outstripped those incurred in their own, home market.
This is not to deny there is a major supply side problem in the UK housing market. With housebuilding at its lowest level since the 1920s, not enough affordable housing is coming on to the market. Yet the issue here is one of incentives and planning restrictions, not of massive, unrecognised losses in the banking system on UK mortgages.
The same goes for infrastructure investment, where barriers to development need to be removed and incentives provided. Very depressed levels of business investment raise a whole host of other supply side issues, high levels of taxation and regulation among them.
With SMEs, absent credit – in part caused by higher capital requirements on unsecured forms of lending – remains a major barrier to the structural shift to tradable goods and services which the economy needs. The UK wants to rebalance, yet it imposes higher capital requirements on SME lending than it does on mortgages. How stupid is that?
In addition to the wrong sort of growth, Britain has also had the wrong form of austerity, with fiscal consolidation initially heavily loaded on to growth-destroying tax increases. We’ll be waiting for eternity if it’s global rebalancing we have to rely on for a sustainable future. In the meantime, there is plenty that can be done to help ourselves.
A Scot has won at Wimbledon, the “Welsh” Lions have triumphed Down Under, an adopted Englishman leads the Tour de France, house prices are rising, the sun is shining, the economy is growing, God is in his Heaven and all’s right with the world.
It seems an article of faith that not until we have seen a Spanish-style meltdown in prices will Britain finally exorcise the evil of the last housing bubble Photo: Reuters By Jeremy Warner
8:59PM BST 08 Jul 2013
230 Comments The national mood is important in economics – too glum and it threatens a downward spiral in demand, but, if buoyant, it can be an equally powerful propellant. Right now, we seem to be in something of a sweet patch, with growing confidence that the worst of the financial and accompanying economic crisis may finally be behind us.
Scratch the surface, however, and an altogether more concerning picture emerges. Yes indeed, the economy is growing again, prompting a scramble among City economists to keep up with a fast-changing story.
One or two have raised their forecasts for this year to as high as 2pc, against just 0.6pc forecast by the Office for Budget Responsibility as recently as March, and even the naturally lagging consensus has shifted decisively back to around 1pc.
So can we all breathe a sigh of relief and get back to business as usual? Not so fast, for “business as usual” may be a large part of the problem.
All growth is welcome, but if there is such a thing as the wrong type of growth, the present recovery looks very much like it.
Related Articles
- French business leaders lash out at Hollande
08 Jul 2013 - Confidence in Britain's economy at 13-month high
08 Jul 2013 - 'Abenomics’ is big in Japan as economy takes upturn
07 Jul 2013 - Pension funds 'sitting on billions’ for building
07 Jul 2013 - Eurozone weakness hits German exports
08 Jul 2013 - Sponsored Video: dealing with complex projects
To the extent that there is a convincing recovery taking hold, it is driven by very much the same combination of easy money and excessive consumption, private as well as government, that we saw in the pre-crisis years. This new spate of growth looks just as unbalanced, and therefore unsustainable, as it was back then.
The economy is growing, but business investment remains at rock bottom, and despite a near 25pc devaluation in Britain’s trade weighted exchange rate since the crisis began, there is very little evidence of significant improvements in net trade either.
Recent data point to an upswing in manufacturing, but we’ve seen these mini-revivals before, and regrettably, the big picture is that consumption is still the main force keeping output alive, not production. The UK is getting the growth in demand, but it is not getting the growth in capacity to sustain it.
Worse, real wages are continuing to fall, even though we are spending more. As a result, the savings rate has once again fallen to perilously low levels.
Sir Mervyn King, former Governor of the Bank of England, has coined the term “the paradox of policy” to explain this phenomenon. The Bank of England is deliberately pursuing a policy that brings about the opposite in the short term of what it wants to achieve in the long run – it has been supporting spending with unprecedented quantities of loose money even though it knows that ultimately Britain must raise national savings substantially.
This approach might be regarded as merely delaying the inevitable, but it’s hard to see the alternatives; doing anything else would only have recreated in Britain the same depression and economic atrophy that afflicts the eurozone periphery. Britain is too indebted to be able to tolerate a rapid return to higher interest rates.
The key point about policy was recently articulated by Sir Mervyn in his valedictory speech: “The real challenge – on a global scale – is to rebalance the world economy so that very low interest rates are not required to exhort deficit countries to spend in order to absorb the surpluses elsewhere."
As Britain demonstrated after exiting the ERM, it is perfectly possible to have growth, rebalancing and fiscal consolidation all occurring coincidentally, but it requires rising demand in major trading partners. The eurozone crisis has snuffed out all hope of such a benign adjustment for the foreseeable future, leaving Britain again dependent on credit-fuelled domestic demand and whatever success it can achieve in neglected markets further afield.
What, if anything, can be done? Like a scratched record, the answer keeps on repeating itself – supply-side reform. But before exploring what might help, it’s worth killing off a particular canard – that attempting to revive the housing market will only create another bubble and therefore even more of the wrong sort of growth.
There has been a lot of this sort of commentary around since the Government announced its “Help to Buy” scheme in the March Budget. The Office for Budget Responsibility, the International Monetary Fund, Labour’s Jack Dromey, uncle Tom Cobley and all have condemned the scheme for fuelling prices while failing to boost supply.
And they are half right; in principle, it cannot be a good idea to use taxpayers’ money to subsidise property ownership. On the other hand, housing is a key part of the UK economy, transactions are still exceptionally low by historic standards, and prices have already seen quite an adjustment in real terms.
Even so, it seems an article of faith that not until we have seen a Spanish-style meltdown in prices will Britain finally exorcise the evil of the last housing bubble.
This is a bit like the argument that, because finance is supposedly the cause of so many of our recent problems, the UK would be a happier nation with a much smaller City. One thing is for sure; we would certainly be a much poorer one.
UK housing was not the cause of the financial crisis; in fact, UK mortgage lending has remained a haven of calm and safety for the banks throughout the storm.
As Ben Broadbent, a member of the Bank of England’s
Monetary Policy Committee, has pointed out, losses on overseas mortgage lending by UK banks have far outstripped those incurred in their own, home market.
This is not to deny there is a major supply side problem in the UK housing market. With housebuilding at its lowest level since the 1920s, not enough affordable housing is coming on to the market. Yet the issue here is one of incentives and planning restrictions, not of massive, unrecognised losses in the banking system on UK mortgages.
The same goes for infrastructure investment, where barriers to development need to be removed and incentives provided. Very depressed levels of business investment raise a whole host of other supply side issues, high levels of taxation and regulation among them.
With SMEs, absent credit – in part caused by higher capital requirements on unsecured forms of lending – remains a major barrier to the structural shift to tradable goods and services which the economy needs. The UK wants to rebalance, yet it imposes higher capital requirements on SME lending than it does on mortgages. How stupid is that?
In addition to the wrong sort of growth, Britain has also had the wrong form of austerity, with fiscal consolidation initially heavily loaded on to growth-destroying tax increases. We’ll be waiting for eternity if it’s global rebalancing we have to rely on for a sustainable future. In the meantime, there is plenty that can be done to help ourselves.
Comment