Mid year review

In the midst of the Olympic frolics in London this summer we’re distracted from the the forecasts of uncertainty, gloom and (in the FT no less) revolution that were being made at the start of 2012.

I’ve just looked back at the pink paper’s first editions of the year, which included a series of 2012 forecasts in four global outlooks. The only upbeat one was about energy, and the new technological success in tapping shale and natural gas reserves that could put an end to energy insecurity (hardly a wholly good news story – the development of these formerly unavailable reserves will be negative for renewables, energy efficiency and carbon emissions). The other three forecasts predicted, in turn, increasing public anger over inequality, the State running out of time to define its role, and continued political protest and social unrest accelerated by social media.

On the more narrowly economic front, the paper reported the great majority of UK economists could only see minimal growth in 2012, and revealed that corporations – the only ones with cash to spare – continued to be wary of making new investment. According to John Plender, “growth in the developed world will continue to be hostage to the deleveraging process”, with governments either – depending on your point of view – bust, or too frightened of the bond markets to take on new debt

As it’s turning out ‘minimal growth’ was on the optimistic side. The National Institute of Economic Research has a nifty graph showing the progress of the current depression, updated with this year’s double-dip recession, and clearly demonstrating how it’s now far longer-lasting than the 1930s.

‘Crisis? What Crisis?’ understands this phenomena well enough – deficient demand and the paradox of thrift. That a general lack of confidence leads to a self-fulfilling collapse in demand within the private sector. When consumers and governments are both trying to crawl out of debt that situation is far worse.

The only ones with the spending power to come to the rescue are the big corporates that do indeed have a reservoir of cash waiting to be released. Why haven’t they? Plender says for three reasons – a bunching effect in the US which means they’ve already made investments with a good return in response to capital incentives; a precautionary fear that the banks may still go bust leaving them high and dry; and a longer-term trend towards a low investment economy, because of the shift to the service sector and/or the capture of corporate interests by financial institutions obsessed by short-term returns. I’d add  the simpler explanation that no one company can do much about the situation of low consumer demand, so all have little incentive to increase their productive capacity.

In economic theory  this has to end eventually. New demand will finally come from companies making stuff at a lower cost than it previously took, hence creating a surplus and re-distributing that money, in wages or to shareholders if not as new investment.

Difficult as it is to believe right now, it isn’t easy to stop economic growth for any great length of time. It’s been quite an achievement.

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