A fall in confidence that could end in double dip

The Chancellor can no longer sit idly by.

I am beginning to sound like a broken record as the bad data news on the UK economy continues to pile up. Things on the economic front are really not good and, most worrying, are worsening fast before our very eyes.

The major release of the results of the European Commission Economic Sentiment Index, based on business and consumer surveys in August 2011, was a real shocker. The index is made up of five components based on business surveys in industry, services, manufacturing and retail, as well as a consumer survey. These are conducted in identical form in all 27 member countries and are available as a pdf file or can be downloaded as Excel files. Check them out -- they are scary!

In August, the ESI declined by 5.0 points to 97.3 in the EU and by 4.7 points to 98.3 in the euro area. This decline resulted from a broad-based deterioration in sentiment across the sectors, with losses in confidence being particularly marked in services, retail trade and among consumers. Only the construction sector in the euro area recorded an improvement.

Among the largest member states, Germany (-5.7 points) and the UK (-5.6) reported the strongest decreases in sentiment, followed by Poland (-3.6), the Netherlands (-3.0) and, to a lesser extent, Italy (-0.7), while the ESI remained broadly unchanged in Spain (-0.3). The ESI remains above its long-term average only in Germany and stands at 92.9 in the UK, having fallen from 104.6 in March.

Consumer confidence has continued its steady fall and is now at around the same level it was in May 2009 -- and it continues to drop.

Retail and services confidence

Of particular concern in the UK, though, was the dramatic collapse in confidence among businesses in services and retail. This is illustrated in the graph (above), which shows the sharp fall in both surveys over the past three or four months. This is of particular concern, given that the two surveys tracked very well the collapse of output at the onset of recession.

The two surveys started to fall sharply from March 2008 as the economy headed into recession, which was dated as starting in the second quarter of 2008, based on negative GDP growth.

We are able to explore further the reasons for the fall in both sectors as the European Commission provides more disaggregated detail. It is apparent that in both sectors, demand has fallen markedly and expectations for the future are increasingly pessimistic. Retailers are reporting rising inventory levels due to lack of sales.

 

Evidence of doom and gloom in the massive service sector was also reported on Tuesday in the CBI's survey of service-sector firms. Business volumes fell in the UK services sector in the past quarter, at the fastest rate since November 2009, the CBI found. Firms in business and professional services, which had been growing slowly, saw volumes contract unexpectedly.

Volumes of business in consumer services also fell -- and at the fastest rate since November 2009. Richard Woolhouse, the CBI's Head of Fiscal Policy, said:

Activity has fallen across the services sector for the first time since November 2009. This quarter we've seen more evidence of the ongoing decline in consumer services spending, as people with increasingly squeezed household incomes are forced to cut back their discretionary spending.

The concern is that this drop in business and consumer confidence is a prelude to a double-dip recession. I assume that the Chancellor George Osborne will continue to assert that his policies are working. Now that both businesses and consumers are running scared, however, Osborne can no longer sit idly by and assert that all is well. It is time for further fiscal stimulus.

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

Photo: Getty
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The big problem for the NHS? Local government cuts

Even a U-Turn on planned cuts to the service itself will still leave the NHS under heavy pressure. 

38Degrees has uncovered a series of grisly plans for the NHS over the coming years. Among the highlights: severe cuts to frontline services at the Midland Metropolitan Hospital, including but limited to the closure of its Accident and Emergency department. Elsewhere, one of three hospitals in Leicester, Leicestershire and Rutland are to be shuttered, while there will be cuts to acute services in Suffolk and North East Essex.

These cuts come despite an additional £8bn annual cash injection into the NHS, characterised as the bare minimum needed by Simon Stevens, the head of NHS England.

The cuts are outlined in draft sustainability and transformation plans (STP) that will be approved in October before kicking off a period of wider consultation.

The problem for the NHS is twofold: although its funding remains ringfenced, healthcare inflation means that in reality, the health service requires above-inflation increases to stand still. But the second, bigger problem aren’t cuts to the NHS but to the rest of government spending, particularly local government cuts.

That has seen more pressure on hospital beds as outpatients who require further non-emergency care have nowhere to go, increasing lifestyle problems as cash-strapped councils either close or increase prices at subsidised local authority gyms, build on green space to make the best out of Britain’s booming property market, and cut other corners to manage the growing backlog of devolved cuts.

All of which means even a bigger supply of cash for the NHS than the £8bn promised at the last election – even the bonanza pledged by Vote Leave in the referendum, in fact – will still find itself disappearing down the cracks left by cuts elsewhere. 

Stephen Bush is special correspondent at the New Statesman. He usually writes about politics.