Blogs

It’s the economy.....

Blog #1

Good article by Peter Kellner in the Guardian last week suggesting that the essential narratives for the next General Election were now in place. The Coalition parties can now say that they have weathered the terrible economic conditions bequeathed by New Labour and at long last the economy is growing and all the other benefits – higher incomes, lower unemployment and so on - are set to return. The Labour party, on the other hand, will say that the recession was longer and more painful than it needed to be, and that the recovery is not affecting real lives of real people, but is a statistical nicety. Choose your narrative and decide who to vote for.

I think it is easier to deride the Labour analysis. They can quite rightly complain that things are not getting better for 90% of the country just because a few economic indicators are finally rising. However, it seems unlikely that by the time of the next election – assuming continued (if desultory) growth – at least many of those benefits have not been delivered. We would expect unemployment to be falling and incomes to be rising. There is no doubt that the recession started under Labour’s watch and the Coalition will be seen to have succeeded in its main ambition. If Labour persists with that narrative I would expect them to lose quite heavily.

The flaw in the Government’s claim is rather more subtle. I think this is the start of a very slow recovery, but it is not the recovery we have been promised. It is in fact a very New Labour recovery, and very much what Labour would have given us had they won the last election. The Coalition was aiming for a ‘re-balanced’ economy, one that was less dependent on the banking and finance sectors, less dominated by London and the South East, one which was led by manufacturing and exports. What we have is a service sector, South East led recovery whose first real manifestation is a housing bubble. This is not a rebalancing of the economy but more of the same economic model which failed so abysmally five years ago.

In my view signs of recovery can only be welcomed. It has been a desperate few years for most people, and any relief will be welcome. But it is not the recovery the government wants or is looking for and it is not the sort of recovery which will lead to sustainable growth over the longer term.

Anyone remember Boom and Bust?

Blog #2

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Comments

Pete Birks

“You write: "What we have is a service sector, South East led recovery whose first real manifestation is a housing bubble. This is not a rebalancing of the economy but more of the same economic model which failed so abysmally five years ago."

The housing bubble is not a manifestation of the recovery. The increased pumping of cash by the govt into housing creates an asset bubble (i.e., one not based on any increase in "real" output) that is the cause of the recovery. The housing bubble is the horse pulling the cart of increased spending, not the other way round.

It's an important distinction, because an asset-led "recovery" will have a lower multiplier effect than a production-led recovery. That is, the money being pumped into the economy by the govt and BoE will have a significantly lower overall economic effect (and will have a negative effect on the Balance of Payments) than if we had the originally planned "export-led" recovery.

In a sense, you are right, this is exactly like the boom in Labour years (where much of the "tax revenues" were based on wealth that didn't really exist) , in that it is not based on any genuine wealth creation. We are, once again, borrowing from the generations to come.

John Dodds

 “Boom and Bust. Didn't Gordon Brown abolish that?”


  

If you would like to comment on any of these Blog pieces please email me on: bjc@briancreese.co.uk

 

 

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