Great fanfares have greeted a full 1% growth in output over the summer – due in no small measure to the Olympic Games. But the downbeats are not so easily impressed – here’s nef on why a recovery, if it ever gets going, will be constrained by higher oil prices.
And, for sure, subsequent data have not been so upbeat, with negative surveys of business in various sectors, and manufacturing output showing no more than a 0.1% rise in September. One FT report suggested lower inflation this year might support a rise in consumer spending, but was negative on government consumption and corporate investment.
Meanwhile, the scary numbers on government cuts are that only £18bn of fiscal contraction is being implemented this year, with £47bn to come in the next two. And there are signs of a worsening European situation – so no help for exports – with German PMI data indicating a contraction in manufacturing during October.
In the light of all this, the siren calls for a helicopter drop have got louder since the summer. An editorial in the FT picked up on comments made by Mervyn King in a speech responding to the clamour for more monetary action. The FT comment makes a series of related points – (1) the failure to sort out the banks is the main thing holding back the economy, so (2) QE cannot help as it will only go into bank coffers, hence (3) those who can spend (big corporates and well-off households) won’t because they’re terrified of the future and (4) those that need to borrow to spend (small businesses and poor households) still won’t be able to.
If not making an outright call for a heli drop, the FT does then say “all options should be on the table” in thinking about ways of channeling money to the private sector. This is essential because the structural weaknesses in the economy render monetary policy ineffective and – the crucial point in the editorial – this means there is no guarantee austerity by itself will lead to a revival. Other action is need to enable the switch from an economy fueled by debt spending to one where demand is based, for several years at least, on investment. Desperate stuff.
My own view? I’m still with Mervyn. We will have to be patient – and the economy that comes out of this may be a better one all round than the one we will get if we push all the panic buttons now. But some sort of more developed National Infrastructure Plan is looking increasingly on the cards.