The pessimists have had a field day but there is another side, David Smith discovers.
The longest (not yet the deepest) recession since the war has taxed some of our best economic brains. The optimists, wrong again last year, have been forced to retreat into their shells, or resort to value notions such as "political uncertainty" to explain the economy's moody determination not to have an upturn. Perpetual pessimists have had a field day, bringing in comparisons with the slump of the inter-way years and suggestions that Britain is in the downwave of a 50-year business cycle, the so-called Kondratieff long wave, after the Russian economist of that name.
Who is right? Has the recovery been delayed, or have we embarked on something more long-term, and definitely more serious, which will turn the 1990s into a decade of misery? Let us eavesdrop on two of the protagonists: Rosy Optimist and Perpetual Pessimist.
RO: The economy was just about to recovery last autumn when the German economy embarked upon its downturn and America went into the second leg of its "double-dip" recession. The fact that the election was delayed from November until april also made people and companies hold back. Now things are improving because domestic political uncertainty can't last forever and America is leading the world out of recession.
PP: Britain's recession had little to do with the world situation. In fact, Germany's post-unification boom helped product remarkable export strength, mitigating the impact of a sharp downturn in domestic demand. Now, the prospect has evened out. The fall in domestic demand has showed signs of levelling off (but not recovering) while export growth has returned to more normal levels. As for political uncertainty, this is a lame excuse. Did Toyota and Nissan hold back on their expansion plans in Britain because of the risk of a change of government? Of course not. Neither did most British companies.
RO: Real incomes, for those in work, have continued to grow strongly during the recession. Average earnings growth has typically run ahead of inflation by three, sometimes four points. People have increased their savings to a level where they can risk running them down. Norman Lamont, in his 10 March budget speech, recorded that a combination of earnings growth and lower mortgage rates means that the average family with a £30,000 mortgage is 15% better off in real terms than in October 1990. History tells us that such money will be spent.
PP: Looking at real incomes for those in work tells us only part of the story. It is necessary to set against these the loss of real incomes for people who have lost their jobs. On this basis, the Treasury forecast tells us that real personal disposable incomes overall will rise by a paltry 0.75% this year, hardly enough to get the economic motor started. Likewise, the benefit to mortgage-payers from lower interest rates has to be set against the loss of investment income for savers. One man's gain from an interest-rate fall is another's loss.
RO: Membership of the exchange rate mechanism (ERM) means that businesses can now look forward to a long period of stability for the pound and, although this is less certain, for interest rates, it is the best recipe for a strong revival.
PP: Now we come to the nub of the argument. ERM membership prevents us using sterling depreciation as an aid to getting out of recession, as was vital in the early 1980s. It also locks us into a high level of real interest rates.
RO: The Government is doing its bit to pull us out of the mire. The Autumn Statement included a big increase in public spending for 1992-3 and subsequent financial years. The £2.2 billion of budget tax cuts will add to the stimulus. Indeed, the Government may have overstimulated the economy at a time when it was ready to recover anyway.
PP: James Callaghan, the then Labour prime minister, said in 1976 that you can't spend your way out of a recession, and he was right. Any positive impact from the so-called fiscal stimulus will be offset by the financial market repercusions of a £28-billion PSBR.
RO: The British economy is basically sound. The gains in productivity, even in the recession, are testimony to the benefits of the supply-side revolution of the 1980s. The sharp rise in unemployment is also a reflection of the new labour market flexibility we enjoy. As recovery comes, the rise in employment will surprise us.
PP: Faced with such misplaced optimism, it is difficult to know where to start. Impressive as the rise in manufacturing productivity has been, the manufacturing base is too small to meet the needs of the British economy - hence a near-£5 billion current account deficit even in the depths of recession. As for the employment shake-out, this is one of the problems. Companies have eased their financial position sector. In such circumstances, where does the recovery in demand come from?
So where does that leave us? My reading is that the economy has had the stuffing knocked out of it. This will be reflected in a reluctance among people and businesses to take risks. I also believe that the business cycle will re-exert itself, as it always has done. The time to become optimistic is when everyone else is gloomy. This is a lesson that has worked well for successful companies, and it may be the watchword for successful forecasters. We shall see.
David Smith is economics editor of The Sunday Times.