Ensuring a sustainable economic recovery
Are we really out of the mess we got ourselves into six years ago? Can it be true that we are the fastest growing economy in the developed world? It would seem so, according to the statistics. But how are we achieving this? It is certainly not coming from the manufacturing sector, an area which Mrs Thatcher as well as her successors neglected in favour of the keep-your-hands-clean service economy. It’s coming from two quarters. First is an increase in investment from business.
At the height of the recession, when there was no money for anything, medium and large businesses were sitting on £75 billion of liquidity – twice the defence budget – which in the right climate they were ready to release. That climate, which is principally one of confidence, has finally come. The second factor which was depressing the whole of the economy was a moribund housing market. When houses start moving again it has a tremendous knock-on effect right across the board. Tired old carpets are thrown out; new kitchens and bathrooms installed; more stylish furniture acquired; dodgy roofs repaired; gardens landscaped and solar panels ordered; double glazing resumed; painting and decorating starts; the DIY stores hum; the list goes on and on.
But important as houses are, we mustn’t obsess about them. There are other things – like the ones which would earn us shed loads of foreign exchange, i.e. manufactured items. We were once so good at manufacturing and can be again. But if there is one area where there is huge room for improvement it is productivity: it is our Achilles’ heel. Why we are so sluggish here beats me. If we can get this up this summer of rejoicing – weather-wise and economy-wise – may open the sluice gates and propel us into a new era of prosperity.
That high risk policy of quantitative easing – essentially printing money – appears to have worked for us, but it didn’t work for the Japanese. They left it too late to begin and as a result entered what has been called the ‘lost decade’ of the nineties. In fact it has been more like two lost decades. They’ve never recovered their old elan. Our own emergency package to survive the financial crisis was more deftly handled, first by Mervyn King (though he was somewhat late dropping interests rates) and then by Mark Carney, both governors of the Bank of England. Perhaps our success has been part due to the City of London’s historic financial expertise
But alongside this, and despite their other cataclysmic failings, we must give credit to Gordon Brown and his chancellor, Alastair Darling. Once they realised the enormity of the crisis – on the Monday following that dire weekend when it struck and the ATMs would have dried up – they moved quickly and decisively to recapitalise the banks. As Wellington said after Waterloo: ‘It was the closest run thing you ever saw in your life’.
Brown’s successor in Downing Street was on a steep learning curve after his chancellor’s earlier silly mantra of ‘sharing the proceeds of growth’, and when he eventually wised up the results were there for all to see. But interest rates cannot stay as they are – it is so unjust to the prudent saver who for years has been bailing out the feckless spender. They must rise, and soon. When it comes it must be small and incremental, like a quarter of a per cent every couple of months; a policy of slowly, slowly catchy monkey, so to speak. This will help cool the overheating housing market.
We don’t have to worry too much about irresponsible lending as in the past, leading to wholesale repossessions, because the criteria today to get a loan and the deposit required has been massively tightened. Some complain that the hoops you have to jump through are as many as to adopt a child.
But two things, above all, are needed to sustain the recovery: first, a massive house-building programme to meet the demand that years of unrestricted immigration have imposed. This, too, will cool house price inflation and re-balancing our economy by boosting manufacturing; and second, markets should then be found for those goods beyond the still Doldrums-plagued Euro area. The obvious target ought to be that vast zone of good will to us, the former empire. With our shared history, common institutions and legals systems and, of course, language, it is calculated that we have a 21% financial advantage over our competitors.