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

How Jim Murphy's mistake cost Labour - and helped make Ruth Davidson

Scottish Labour's former leader's great mistake was to run away from Labour's Scottish referendum, not on it.

The strange revival of Conservative Scotland? Another poll from north of the border, this time from the Times and YouGov, shows the Tories experiencing a revival in Scotland, up to 28 per cent of the vote, enough to net seven extra seats from the SNP.

Adding to the Nationalists’ misery, according to the same poll, they would lose East Dunbartonshire to the Liberal Democrats, reducing their strength in the Commons to a still-formidable 47 seats.

It could be worse than the polls suggest, however. In the elections to the Scottish Parliament last year, parties which backed a No vote in the referendum did better in the first-past-the-post seats than the polls would have suggested – thanks to tactical voting by No voters, who backed whichever party had the best chance of beating the SNP.

The strategic insight of Ruth Davidson, the Conservative leader in Scotland, was to to recast her party as the loudest defender of the Union between Scotland and the rest of the United Kingdom. She has absorbed large chunks of that vote from the Liberal Democrats and Labour, but, paradoxically, at the Holyrood elections at least, the “Unionist coalition” she assembled helped those parties even though it cost the vote share.

The big thing to watch is not just where the parties of the Union make gains, but where they successfully form strong second-places against whoever the strongest pro-Union party is.

Davidson’s popularity and eye for a good photo opportunity – which came first is an interesting question – mean that the natural benefactor in most places will likely be the Tories.

But it could have been very different. The first politician to hit successfully upon the “last defender of the Union” routine was Ian Murray, the last Labour MP in Scotland, who squeezed both the  Liberal Democrat and Conservative vote in his seat of Edinburgh South.

His then-leader in Scotland, Jim Murphy, had a different idea. He fought the election in 2015 to the SNP’s left, with the slogan of “Whether you’re Yes, or No, the Tories have got to go”.  There were a couple of problems with that approach, as one  former staffer put it: “Firstly, the SNP weren’t going to put the Tories in, and everyone knew it. Secondly, no-one but us wanted to move on [from the referendum]”.

Then again under different leadership, this time under Kezia Dugdale, Scottish Labour once again fought a campaign explicitly to the left of the SNP, promising to increase taxation to blunt cuts devolved from Westminster, and an agnostic position on the referendum. Dugdale said she’d be open to voting to leave the United Kingdom if Britain left the European Union. Senior Scottish Labour figures flirted with the idea that the party might be neutral in a forthcoming election. Once again, the party tried to move on – but no-one else wanted to move on.

How different things might be if instead of running away from their referendum campaign, Jim Murphy had run towards it in 2015. 

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to British politics.

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