Economic punditry takes the glimmerings of a trend and projects it to insane dimensions. Current reactions to the economy show this art at its worst. Six months ago all was gloom and doom: recession produced by overvaluation leading to rising unemployment and low, if not negative, growth. Now we see growth scenarios, fears of inflation, and assertions that we’ve discovered the new paradigm of perpetual growth.
If I were an estate agent in London I’d buy it. But manufacturers, exporters and engineers should be more cautious.
Manufacturing has contracted, is contracting, and has further to shrink. Production is up only 2.5% on 1995. Imports are growing at twice the rate of exports because we are still running the economy for finance not production.
The manufacturing economy has to exist in a tough world with surplus capacity and increasing competition from low-wage economies, all made more competitive by devaluations in Asia and the euro zone.
It is, therefore, very vulnerable when the pound is overvalued. No improvements in productivity or labour costs can compensate for the loss of price competitiveness. So imports are rising and the trade deficit widening, and we are faced with the familiar British trap of low growth while the world expands.
A number of factors, mostly temporary, have continued to produce the illusion, apparently shared by the Bank of England’s Monetary Policy Committee, that the economic outlook is rosy: low inflation is here to stay; the power of labour and the unions is broken as uncertainty creates a sustained fear for jobs, holding back wage demands; competition is intense and imports cheap.
At the same time, consumers are optimistic. Low inflation is encouraging them to spend, credit is loose, negative equity less pressing, and equity withdrawal can resume. Asset prices are rising, particularly house prices in areas where pundits, economists, and Bank of England officials live: the south east. People feel they have more money and spend accordingly.
Finally, the government is increasing spending. Not enough, but allowing the public sector to take up some of the slack as the productive economy falters.
But all this fuels consumption not investment, so UK industry benefits minimally but imports rise fast. The benefits go to France and Germany. This type of economy can’t be sustained, but has been strong enough to produce the exaggerated feeling that `we have come through’.
We haven’t. Research, design, development and investment are still being cut. Firms are exporting at a loss to hang on to their markets.
Buoyancy in the south east and the service sector is doing nothing for manufacturing. Some car manufacturers are lining up with begging bowls and demanding that what they lose through overvaluation should be made good by public spending.
Power remains in the hands of the financial sector through the Monetary Policy Committee, which has turned fidgeting into a system of economic management, kept interest rates far too high (currently twice the average rate in Europe) and pushed the pound up to ruinous levels.
Last week’s decision to raise interest rates has given the wrong signal to markets because it tells them sterling will be kept high and the bank will clobber production in a futile attempt to check house prices in the south east. Meanwhile we are throwing away the opportunity low inflation gives us to go for growth and so repair the damage.
Soon it may be too late, for the balance of payments will force deflation and interest rate rises to shore up the pound. Gordon Brown is running a surplus rather than the deficit and the borrowing boost we need. There’s no way this can be sustained.
We gloom-mongers have been accused of being over-pessimistic, but we weren’t far out. And I’d hate to be proved right.
Austin Mitchell is Labour MP for Great Grimsby