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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The tale of Battersea power station shows how affordable housing is lost

Initially, the developers promised 636 affordable homes. Now, they have reduced the number to 386. 

It’s the most predictable trick in the big book of property development. A developer signs an agreement with a local council promising to provide a barely acceptable level of barely affordable housing, then slashes these commitments at the first, second and third signs of trouble. It’s happened all over the country, from Hastings to Cumbria. But it happens most often in London, and most recently of all at Battersea power station, the Thames landmark and long-time London ruin which I wrote about in my 2016 book, Up In Smoke: The Failed Dreams of Battersea Power Station. For decades, the power station was one of London’s most popular buildings but now it represents some of the most depressing aspects of the capital’s attempts at regeneration. Almost in shame, the building itself has started to disappear from view behind a curtain of ugly gold-and-glass apartments aimed squarely at the international rich. The Battersea power station development is costing around £9bn. There will be around 4,200 flats, an office for Apple and a new Tube station. But only 386 of the new flats will be considered affordable

What makes the Battersea power station development worse is the developer’s argument for why there are so few affordable homes, which runs something like this. The bottom is falling out of the luxury homes market because too many are being built, which means developers can no longer afford to build the sort of homes that people actually want. It’s yet another sign of the failure of the housing market to provide what is most needed. But it also highlights the delusion of politicians who still seem to believe that property developers are going to provide the answers to one of the most pressing problems in politics.

A Malaysian consortium acquired the power station in 2012 and initially promised to build 517 affordable units, which then rose to 636. This was pretty meagre, but with four developers having already failed to develop the site, it was enough to satisfy Wandsworth council. By the time I wrote Up In Smoke, this had been reduced back to 565 units – around 15 per cent of the total number of new flats. Now the developers want to build only 386 affordable homes – around 9 per cent of the final residential offering, which includes expensive flats bought by the likes of Sting and Bear Grylls. 

The developers say this is because of escalating costs and the technical challenges of restoring the power station – but it’s also the case that the entire Nine Elms area between Battersea and Vauxhall is experiencing a glut of similar property, which is driving down prices. They want to focus instead on paying for the new Northern Line extension that joins the power station to Kennington. The slashing of affordable housing can be done without need for a new planning application or public consultation by using a “deed of variation”. It also means Mayor Sadiq Khan can’t do much more than write to Wandsworth urging the council to reject the new scheme. There’s little chance of that. Conservative Wandsworth has been committed to a developer-led solution to the power station for three decades and in that time has perfected the art of rolling over, despite several excruciating, and occasionally hilarious, disappointments.

The Battersea power station situation also highlights the sophistry developers will use to excuse any decision. When I interviewed Rob Tincknell, the developer’s chief executive, in 2014, he boasted it was the developer’s commitment to paying for the Northern Line extension (NLE) that was allowing the already limited amount of affordable housing to be built in the first place. Without the NLE, he insisted, they would never be able to build this number of affordable units. “The important point to note is that the NLE project allows the development density in the district of Nine Elms to nearly double,” he said. “Therefore, without the NLE the density at Battersea would be about half and even if there was a higher level of affordable, say 30 per cent, it would be a percentage of a lower figure and therefore the city wouldn’t get any more affordable than they do now.”

Now the argument is reversed. Because the developer has to pay for the transport infrastructure, they can’t afford to build as much affordable housing. Smart hey?

It’s not entirely hopeless. Wandsworth may yet reject the plan, while the developers say they hope to restore the missing 250 units at the end of the build.

But I wouldn’t hold your breath.

This is a version of a blog post which originally appeared here.

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