If you see green shoots, it's time to watch out
First published in the Telegraph on 26 February 2009
It is that time of the year. The frost is starting to give over, the cold weather is abating, the days are lengthening, and before long the leaves will be sprouting on the trees. That’s right: it’s green shoots season.
But not for the economy, even though a cabal of economists and commentators are doing their best to argue otherwise. One can understand why. All this doom and gloom is dreadfully boring and dispiriting. Time, surely, for a change of tone?
There they were, at it again yesterday, displaying rictus-grin delight at the latest revision to the gross domestic product statistics. Yes, it showed the recession actually began earlier than thought; yes the economy is contracting by 1.5 per cent and the consumer is bearing the brunt; but wasn’t it wonderful that the figures were no worse than expected? Mortgage lending and retail sales statistics were “horrendous”, but were welcomed for not diving as deep into negative territory as feared. A slight up-tick in house prices becomes a sign of the property market’s rebirth, while the fact that fewer homes changed hands last month than since at least 1959 goes unmentioned.
Given how appalling the flow of economic news has been, one should hardly be surprised at the desperation to seize on any notes of optimism. But it is time for a reality check. The economy is in a recession which will last until well into next year, if not longer. A further 1.5 million people have yet to lose their jobs. The average homeowner is losing pounds 575 a week on his or her home, based on price performance over the past year. And we are already mired in deflation. Anyone who still doubts this last fact should examine the data: over the past five months alone, prices have fallen by 3.8 per cent. Even the consumer price index, which excludes house prices and mortgage interest rates, is down by 1.5 per cent in the same period. Only the annual inflation rate, which still includes the effect of the oil price shock last year, is still in positive territory, and won’t be for much longer.
The only way the country will recover from this recession is by facing up to its excesses over the previous decade. We must borrow less, save more and rebalance our economy, away from delusional financial wizardry towards more manufacturing, more exports and less unsustainable spending. This cultural shift will not happen until we, as a polity, realise the consequences of not doing so, and that means many more months – and more likely years – of economic gloom.
None of this is to say the green shoots of recovery will not arrive. In fact, perversely, Britain should see them sprouting sooner than international counterparts such as Germany and Japan. In part this is because the Bank of England slashed interest rates so much faster than the European Central Bank, and has committed more to quantitative easing – printing money, in all but name. In part, it is because the pound has fallen vertiginously over the past year, which will lead to a wave of investment from those overseas with cash. Britain is Europe’s bargain basement, its Poundstretcher. Provided sterling stays weak, more cash will pour in over the next few months and the terrifying trade deficits built up over the past decade will begin to diminish. House prices, having fallen by 15 per cent over the past year, are starting to look like good value – though they will probably fall further in the next couple of years and will not start rising for quite some time.
Strange as it may sound, however, the arrival of those green shoots will not be an occasion to celebrate. The moment good news starts to trickle into the system is the very moment that the really difficult decisions have to be taken. It is easy to slash interest rates and taxes and lift borrowing when you are in the midst of a crisis. Raising rates, and cutting the budget deficit by raising taxes and reducing public spending, are far more difficult – particularly when the collapse of the financial system is a half-dissolved memory and the populace is looking forward to the return of good times.
Still, it will have to happen. Those of us who have signed up to the idea that the Bank of England should start printing money have done so on the proviso that that money is pulped as soon as any hints of inflation start to surface. And it is certain that they will. Should the Government avert a deflationary spiral and a Thirties-style depression, it will be at the cost of unleashing inflation on the economy thereafter.
It is clear that, as they try to fight their domestic recessions over the next couple of years, all major economies will swell their national debts to levels unprecedented in peacetime. Some will undoubtedly default: Britain is at risk, as is just about every country you could mention. But for those that survive, there is a fantastic long-term opportunity. Those nations that prove they can bring their books into order swiftly but sensibly will be the ones that thrive over the coming decades. They will be the economic tigers of the future.
But be in no doubt: the minute those green shoots start to sprout, this crisis starts getting really tricky.