30 Jun 2009

Can green shoots survive outside the government greenhouse?

If there are green shoots appearing in the economy, then the slugs have started to munch them.
A shock fall of 2.4 per cent in the first quarter of 2009 is the worst quarter-on-quarter fall since 1958. The annual fall in the economy of  -4.9 per cent of GDP is the largest since records began in 1948.

In fact, have a look at the historical attempts (Labour Market Trends 2003 with the help of Thelma Leisner) to create annual GDP figures, and that number is the worst peacetime number since 1926 and 1931.

So in the year to March the economy was collapsing at the fastest peacetime rate for 75 years. Alongside those years it is basically the joint worst peacetime figure since 1900. If you are under the age of 77, you have never had it so bad.

No wonder the Chancellor was cautious in his confidence, and the Bank of England figures reticent over signs of a recovery in our interviews last month.

The cause was some changes to the way construction data is crunched and a reappraisal of the condition of the service sector of the economy. It represents a poor platform for sustained recovery.
But here is the paradox. It suggests that the hole we were in was much deeper than previously thought. It puts the Treasury forecast of a contraction of 3.5 per cent back in peril. Nonetheless, the evidence still remains of some sort of stabilisation after these figures, from April onwards.

Indeed the Chairman of the Financial Services Authority, Lord Turner, was moved to tell me today that ‘you can now talk about green shoots without being ridiculed’.
What all that shows is the remarkable power of the weaponry deployed by the Bank of England and Government in recent months. In a bizarre way the Government could choose to take some sort of credit from these figures. The unprecedented actions taken did put a floor under an economy that we now see was suffering a calamitous collapse.
The problem is that these actions were a sticking plaster and not a cure. They manifest themselves in a slightly false form of credit creation (state run banks offering 95 per cent mortgages etc) that surely can not really continue (that seemed to be the message from the Bank of England Deputy Governor Paul Tucker to bankers today).

Despite today’s number, there are green shoots. Unfortunately they have been incubated in a state-owned taxpayer funded hydroponic greenhouse.

It is far from certain that they can grow on their own.