Double Dip Beckons for English Patient: David G. Blanchflower
The patient looks comatose. Life support must remain switched on until health is restored.
The U.K. private sector is ailing and still needs a good deal of nursing. Cut public spending now and large numbers of firms, especially small ones, will fail. That famous double-dip recession is beckoning. The markets ought to care about that.
As voters prepare to go to the polls tomorrow, there is a shared consensus among all three of the U.K.’s political parties that draconian cuts in public spending are needed from 2011 to 2015. They agree it is appropriate to implement such a program of fiscal retrenchment to deal with the budget deficit, which has widened to almost 12 percent of gross domestic product.
There is some disagreement, though, on the scale of such cutbacks, with the Conservatives arguing for more, the Liberal Democrats for less and the Labour Party in between.
None of the parties has come clean on where they intend to cut, what taxes they will raise and by how much, or what they would do if the optimistic growth projections on which all of their estimates are based don’t come to pass. The Tories also want to cut by a further 6 billion pounds ($9.1 billion) immediately, as far as I can tell, simply to look tough.
The big question that none of the parties has answered is where the private sector is in all of this. Is it about to spring into action to fill the holes left by the public sector? I think not.
The rapid, unprecedented action on the part of the monetary and fiscal authorities to inject stimulus prevented us from falling into a major economic depression, with unemployment perhaps as high as 20 percent and much more dramatic drops in output. The public sector has been the only show in town and this helped to crowd in the private sector.
The crucial issue is whether the public sector is starting to crowd out private enterprise. If it is, then let’s have less public, more private and hey presto. This argument is frequently made in good times. In my view, such a scenario seems unlikely to apply at present because the U.K. private sector remains in intensive care and is unable to breathe on its own.
The concern is that public-spending cuts or increased taxes would reduce the size of private industry and make things worse. This really will depend on how much growth the private sector stands ready to deliver in 2011 and 2012. Not much is my claim.
The British Chambers of Commerce in its survey of businesses for the first quarter of 2010 said business confidence was weak and investment intentions had worsened. Employment intentions also haven’t picked up from their lows in manufacturing even after the depreciation of the pound. Businesses in manufacturing and services continued to face serious financial difficulty. The BCC said the recovery “is weak and the economy is facing serious risks” and “is set to remain sluggish and fragile.”
Evidence from the European Union survey of consumer confidence in the U.K. showed a decline in April. There was also a large drop in the share of those planning to make a major purchase. Most business and consumer benchmarks in these EU surveys remain well below averages, though they are up slightly from the lows of a year ago. Little sign of a recovery here.
The Bank of England’s agents recently reported that retail- sales growth had slowed at the start of 2010. The gradual recovery in the housing market was also weakening. Investment intentions remained subdued. Prospects in the construction industry were bleak, “reflecting the dwindling pipeline of commercial projects and expected cuts in public spending.” Little sign of life here, either.
In its April 2010 Trends in Lending survey, the Bank of England said the flow of net lending to U.K. businesses remained negative, contracting by 800 million pounds in February. The bank’s Credit Conditions Survey indicated that, for smaller businesses, spreads on lending had increased. Household demand for secured credit for house purchases fell in that survey.
The most recent data published by the Office of National Statistics showed that for the fourth quarter of 2009 business investment is estimated to have fallen 4.3 percent from the previous quarter and is almost 24 percent lower than the fourth quarter of 2008. Business investment in manufacturing and services fell 32 percent and 23 percent respectively on the year. Construction investment dropped 23 percent on the quarter.
The story on the labor market is far from encouraging. Total employment fell 89,000 in the period December through February. Employment increased in the public sector but fell in every private-sector industry grouping. Full-time jobs are disappearing especially rapidly. The unemployment rate increased from 7.8 percent to 8 percent and vacancies fell. Construction employment continues to fall apace. No boom here.
When voters make their choice tomorrow, they will be helping to shape the future of the business sector. Without continued government support, the patient’s prognosis is grim.
(David G. Blanchflower, a former member of the Bank of England’s Monetary Policy Committee, is professor of economics at Dartmouth College and the University of Stirling. The opinions expressed are his own.)
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