Expecting a double dip
Over the past few weeks I’ve become very worried about the state of the British, and indeed world, economy. So worried in fact that I’ve changed my central view. I used to think that we would experience a period of sluggish growth with a downside chance of an actual double dip, but now expect a double dip with sluggish growth as the most likely upside scenario.
I’m writing this a week and a half before we get the first look at the Q1 2011 growth figures, but I’m more concerned about Q2 and especially Q3 onwards. For me to change my view again, I’d have to see very strong figures next week. Something which looks unlikely.
Whilst there has always been a real worry about growth in 2011, I’ve until now been reluctant to suggest that a second downturn is likely. If we actually get growth of 1/1.2% for the year, I don’t like the idea of certain people ‘celebrating’ this as a success but I think the time for expectations management has passed.
For me the final piece of the jigsaw making me change my view came last week with the juxtaposition of the inflation and retail sales numbers on the same day. Inflation unexpectedly fell driven by grocers cutting costs but retail sales (despite price drops) suffered their worst fall since the records began.
I’m getting what can only be described as a ‘mid 2008 feeling’ – financial market troubles (this time mainly in the Euro area rather than directly in the banks), soaring commodity prices, signs of stress in the real economy and what can only be described as complacency in the forecasting community. Back in mid 2008 the consensus view (held by most city analysts, the BCC, the CBI, OECD, EU,* etc, etc) was that the UK would avoid a recession. We now know it had actually already started.
The OBR forecasts for 2011 and 2012 will doubtlessly be wrong – something they themselves admit. It’s next-door to impossible to produce accurate macro forecasts on that time frame, hence the fact they publish fan charts showing possible outcomes as well as a central forecast.
The only question is how wrong – will we see some sort of weak growth as they forecast or will we actually have two consecutive quarters of negative growth?
As I currently see it, for the OBR to be more right than wrong, four (nearly) impossible things have to happen.
1 – The impact of spending cuts on growth has to be a lot lower than the IMF estimate them to be.
2 – We have to experience very fast export growth (despite our major trading partner, the EU, being wracked by problems and austerity) and, at the same time, historically slow import growth.
3 – We need a mid/late 1990s style investment boom. Something that is not happening yet.
Whilst one or two of these things might happen, I just don’t see them all occurring. And that means that by Q2/Q3 the economy could be serious trouble. Again.
Does this mean we should forget about the deficit and concentrate entirely on growth? No– and anyway that is something of a false choice as growth is a hugely important factor in deficit reduction. But it does suggest to me that the excessive front loading of deficit reduction that Osborne is trying should be rethought. I’m increasingly drawn to the Deficit Reduction Averaging approach suggested by Adam Lent and Tony Dolphin, but of course that would mean moving more of the pain back from 2011 and 2012 and into 2013 and 2014, dangerously close to an election from the government’s point of view.
I’ll write more on this topic in the coming weeks and eagerly await the data.
* Also worth a look at the EU’s deficit forecasts for the UK as of Spring 2008. A forecast of 3.5% deficit for 2009/10…