I write after the biggest one-week percentage fall on Wall Street since the recession of the 1930s.
I don’t know how much everything will be different after the terrible events of 11 September and subsequent military action – in a sense, success should mean that western societies remain as open as they were pre-11 September – but it is already clear that the US economy is going to be weaker.
While bargain hunters gave a boost to share prices, reversing some of the huge losses suffered over the past two weeks, the markets have a very long way to rise to make up for the heavy falls. The economic question now is whether events in the US are going to trigger a recession, or whether we in Britain will get by with something less disastrous.
In the US itself, I think there is little doubt that there will be a recession. Business and consumer spending alike are much more closely connected to the level of Wall Street than spending is in Britain; more than a third of all Americans invest directly in the stock market, so their wealth and spending power is directly linked to its ups and downs, and businesses keep a hawk-eye on their share price.
On top of this, the US has spent 20 years whittling away at its welfare benefits, so that when people get thrown out of work there is less compensating spending power. The so-called automatic stabilisers have been weakened.
US consumers were already overstretched when the atrocities in New York and Washington happened; they had been spending more than they earned for close to a year, making up the difference by running up debt, which they weren’t worried about because their shares were booming on Wall Street.
Now that Wall Street has tumbled their debt looks more alarming, and a period of retrenchment is certain – aided and abetted by the psychological impact of the terrorist attack.
The US is no longer a safe haven. The fall in airline passenger numbers and its impact on the airlines is just one storm warning among many. The US is going to have a recession, but I suspect it may not last much more than 12 months. Interest rates have been cut aggressively and George Bush’s tax cuts will help.
So if the elephant catches a cold, what about the animals in the rest of the forest? I have no doubt that the British economy will slow down – it needed to, as anyone trying to buy a house in the London area will know – but we have an enormous stroke of good fortune. This is the year that government spending is set to expand by as much as 10% in real terms as government departments spend not only this year’s cash allocation, but also their underspend from the last two years.
For the first time since the war, Britain is enjoying a really lucky moment of economic policy. If the spending increase were a year later, it would be too late; if it had happened with the economy doing well it might have provoked inflation. As it is, it’s kicking in just when we need it – almost to the month.
It has taken departments far too long to change their miserly habits, but they are beginning to spend just when we need it.
Will Hutton is chief executive of the Industrial Society.