It may be too late to prevent recession

George Osborne's policies have failed. He talked down the economy -- and now it is sinking.

The data releases this week have all been bad for the coalition. It started in the United States, which matters because generally what happens there is repeated in the UK a few months later.

First, the Conference Board published data on consumer confidence that showed a much greater collapse than had been expected, especially in relation to the respondents' expectations for the future.

Second, the Case-Shiller house price index -- the leading measure of US home prices -- shows that the US National Home Price Index declined by 4.2 per cent in the first quarter of 2011, after having fallen 3.6 per cent in the fourth quarter of 2010. The National Index hit a new recession low with the first quarter's data and posted an annual decline of 5.1 per cent versus the first quarter of 2010. Nationally, home prices are back to their mid-2002 levels. As of March 2011, 19 of the 20 MSAs covered the index were down compared to March 2010.

Third, ahead of the official release of employment data on Friday, an ADP Employment Services report suggests that private-sector payroll growth slowed sharply in May, falling to the lowest level in eight months. This prompted some economists to lower their forecasts for job growth in Friday's data release. It looks as if the US is slowing.

In Europe, the final Markit eurozone manufacturing PMI fell sharply to a seven-month low of 54.6 in May, down from 58.0 in April and below the flash estimate of 54.8. The fall in the index was the largest since November 2008, as manufacturers reported slower rates of increase in output, new orders, employment and inventory accumulation. China is also slowing. Economic output in Australia shrank by 1.2 per cent in the three months to March -- the worst quarterly slide since 1991 -- the national accounts of the Australian Bureau of Statistics showed yesterday.

The data releases for the UK today were truly awful. They follow from the public finance data that shows that, far from paying off the debt, Osborne is increasing it. Plus such growth as there wasn't -­ GDP grew by zero over the past six months -- was driven by government spending. Then, today, the PMI for manufacturing in May was worse than the market expected.

According to Capital Economics, on past form, that leaves the balance consistent with quarterly falls in manufacturing output of around 1 per cent. Some of this fall, it argues, is likely to have been driven by the temporary disruption to supply chains caused by the Japanese earthquake. But Capital Economics points out that the new orders balance also fell from 50.8 to 48.3, which, it argues, suggests that "beneath the monthly volatility, a sharp underlying slowdown in demand is taking place".

There were also a number of statistical releases from the Bank of England, which added to the bleak picture. It appears that banks are simply not lending enough to get the economy moving. This suggests the poorly named Merlin project -- which should be renamed the Mickey Mouse project -- has not worked any magic. First, the money-supply growth was weak. Second, the stock of lending to UK businesses overall contracted in the three months to February, as did the stock of lending to small and medium-sized enterprises. Third, the number of loans approved for house purchases fell by 4 per cent to a four-month low of 45,166 in April ­- the lowest figure for April since records began in 1992.

This inept Chancellor has talked the economy down by falsely claiming it was bankrupt when it wasn't, which has decimated animal spirits among both businesses and consumers. He has also tried to blame a once-in-a-hundred-year global financial crisis on the previous government, which was clearly also untrue and hyperbolic. Osborne has implemented toothless regulation over the banks and has demonstrably failed to get them to lend. He also has no interest in controlling bankers' bonuses, despite his absurd claims to the contrary when he was shadow chancellor. And all of this before the public spending cuts hit: currently it is the public sector that is the driver for growth but that is all about to change. The public finances are worsening, not improving.

The government's economic policy is in total disarray and the economy is sinking. Osborne has been hoisted by his own petard; his numerous false claims were inevitably going to catch up with him and now they have. The coalition's austerity programme was never based on sound economics and was simply a political move to shrink the state. Interestingly, the claims that the economics profession supported his actions have turned out to be false. In my NS column in the issue out tomorrow, I make clear that one of the initial signatories to the letter to the Times that Osborne touted as supporting him ­- the 2010 Nobel Prize winner in economics, Chris Pissarides -­ has now, embarrassingly for Osborne, turned against him and now opposes the ill-conceived and wreckless austerity programme of cuts and tax increases.

It is hard to find any economists outside the City of London that do support the government's strategy, other than a few of the usual right-wing hangers-on.

It is time for Osborne to explain to the British people why his economic policies have failed and what he intends to do about it. My fear is that Slasher has inflicted so much damage on the British economy that it is too late to prevent us slipping back into recession.

David Blanchflower is economics editor of the New Statesman and professor of economics at Dartmouth College, New Hampshire

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Will Euroscepticism prove an unbeatable advantage in the Conservative leadership race?

Conservative members who are eager for Brexit are still searching for a heavyweight champion - and they could yet inherit the earth.

Put your money on Liam Fox? The former Defence Secretary has been given a boost by the news that ConservativeHome’s rolling survey of party members preferences for the next Conservative leader. Jeremy Wilson at BusinessInsider and James Millar at the Sunday Post have both tipped Fox for the top job.

Are they right? The expectation among Conservative MPs is that there will be several candidates from the Tory right: Dominic Raab, Priti Patel and potentially Owen Paterson could all be candidates, while Boris Johnson, in the words of one: “rides both horses – is he the candidate of the left, of the right, or both?”

MPs will whittle down the field of candidates to a top two, who will then be voted on by the membership.  (As Graham Brady, chair of the 1922 Committee, notes in his interview with my colleague George Eaton, Conservative MPs could choose to offer a wider field if they so desired, but would be unlikely to surrender more power to party activists.)

The extreme likelihood is that that contest will be between two candidates: George Osborne and not-George Osborne.  “We know that the Chancellor has a bye to the final,” one minister observes, “But once you’re in the final – well, then it’s anyone’s game.”

Could “not-George Osborne” be Liam Fox? Well, the difficulty, as one MP observes, is we don’t really know what the Conservative leadership election is about:

“We don’t even know what the questions are to which the candidates will attempt to present themselves as the answer. Usually, that question would be: who can win us the election? But now that Labour have Corbyn, that question is taken care of.”

So what’s the question that MPs will be asking? We simply don’t know – and it may be that they come to a very different conclusion to their members, just as in 2001, when Ken Clarke won among MPs – before being defeated in a landslide by Conservative activists.

Much depends not only on the outcome of the European referendum, but also on its conduct. If the contest is particularly bruising, it may be that MPs are looking for a candidate who will “heal and settle”, in the words of one. That would disadvantage Fox, who will likely be a combative presence in the European referendum, and could benefit Boris Johnson, who, as one MP put it, “rides both horses” and will be less intimately linked with the referendum and its outcome than Osborne.

But equally, it could be that Euroscepticism proves to be a less powerful card than we currently expect. Ignoring the not inconsiderable organisational hurdles that have to be cleared to beat Theresa May, Boris Johnson, and potentially any or all of the “next generation” of Sajid Javid, Nicky Morgan or Stephen Crabb, we simply don’t know what the reaction of Conservative members to the In-Out referendum will be.

Firstly, there’s a non-trivial possibility that Leave could still win, despite its difficulties at centre-forward. The incentive to “reward” an Outer will be smaller. But if Britain votes to Remain – and if that vote is seen by Conservative members as the result of “dirty tricks” by the Conservative leadership – it could be that many members, far from sticking around for another three to four years to vote in the election, simply decide to leave. The last time that Cameron went against the dearest instincts of many of his party grassroots, the result was victory for the Prime Minister – and an activist base that, as the result of defections to Ukip and cancelled membership fees, is more socially liberal and more sympathetic to Cameron than it was before. Don’t forget that, for all the worry about “entryism” in the Labour leadership, it was “exitism” – of Labour members who supported David Miliband and liked the New Labour years  - that shifted that party towards Jeremy Corbyn.

It could be that if – as Brady predicts in this week’s New Statesman – the final two is an Inner and an Outer, the Eurosceptic candidate finds that the members who might have backed them are simply no longer around.

It comes back to the biggest known unknown in the race to succeed Cameron: Conservative members. For the first time in British political history, a Prime Minister will be chosen, not by MPs with an electoral mandate of their own or by voters at a general election but by an entirelyself-selecting group: party members. And we simply don't know enough about what they feel - yet. 

Stephen Bush is editor of the Staggers, the New Statesman’s political blog. He usually writes about politics.