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A Curate's Egg of an Economy |
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A Curate’s Egg of an Economy – Commentary no. 399 – 20th August, 2010
“Good in parts, thank you” was the curate’s answer to the question of how was his egg. Essentially, this was the answer the Governor gave last week to the question how did the Bank see the economic outlook? That too is good in parts.
The point is that in its current circumstances the British economy hasn’t got a clear direction. Furthermore, it hasn’t got a smooth outlook either up or down. As the Governor said, it’s in for a very rough ride.
To start with, the Government is administering drastic medicine to a patient who is in need of a quiet convalescence rather than drastic treatment. We are like a sick child in the environment of Sparta. On the other hand, this still leaves us in the position of the curate’s egg. We too are good in parts. Not everything is bad.
Take for instance the position of exports. Currently, they are doing comparatively well. We are starting to improve our business with Asia. We are beginning to take advantage of the fall in the value of Sterling. Yes, we know that this improvement could prove short lived. Never mind. During the last few months, we have proven our ability to take advantage of one positive factor, namely the relative cheapness of Sterling. During last winter, the doomsters were coming out strongly to the effect that this country had precious little manufacturing industry left. Untrue. Car exports are relatively healthy, thanks to the Japanese who’ve come here to run our auto industry. And there’s still Rolls Royce, the world’s leading manufacturer of advance technology aero engines. There are other examples too.
No. The real problem is the public sector. There is going to be massive unemployment as tens of thousands of public sector workers lose their jobs. The immediate result is going to be a very real fall in consumption. The high street is going to feel a substantial drop in real demand. VAT goes up in January. The impact is going to be particularly bad in the many parts of the economy which have become heavily dependent on Government expenditure. These are the areas where the private sector has been squeezed out or has largely been replaced by the public sector. Those that lose their jobs are going to find it very difficult to find alternative employment.
The trouble is that employment in the public sector has not given the people involved the kind of experience which they would really need if they were to switch to the private sector. And employers in the private sector know this.
Their attitude will be that the areas in the country that have become so reliant on public sector employment will not be particularly desirable places to site any new jobs they are thinking of creating. They will prefer places which already have a large proportion of their working population already engaged in private sector jobs. Such places will be much more conducive to having a working environment favourable to private commerce.
What this means this is that the prospect for successful areas of the economy, like the south east, are likely to become even more successful while the unsuccessful areas will become even less successful than they already are.
The same probably will be occurring to that part of the corporate sector which is already paying its way. They will find that the straightened circumstances of the economy, with its concomitant trend towards cutting overheads, and the trend towards cost cutting generally will produce increased efficiency with everybody tending to work harder. Managers will be looking every which way to produce more for less. Overall, business will be getting more profitable, not less. The supply side to the equation will benefit.
If there is a problem, it will be on the demand side. Many goods will be becoming cheaper. The problem will be who is going to buy them?
Moreover, this is going to become a worldwide problem. More and more countries will be trying to solve their economic problems by increasing their exports. At the same time, they will be trying to economise and buy less. Meanwhile, against this background, economies like ours will be endeavouring to repay massive amounts of debt. Globally, this scenario will turn out to be insupportable. The question is whether Britain can get back to a stable balance before the global economy runs out of space to accommodate all this contraction and belt tightening.
The outlook depends on the balance between the kind of countries which still have growth rates approaching double figures like China, India and Brazil and those that are still exerting a contractionary impact, like a number of the weaker brethren in Europe. The whole world scene will ultimately be the result of the balance of these forces.
No wonder the Governor sees the prospects of individual countries, particularly like ours, as facing a rough and difficult path. In these circumstances, what country can genuinely be seeing its outlook as set fair. It may be fair over the next few months but looking ahead who can, at the moment, safely anticipate growth on the long term?
Tony Rudd
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