Why the Lib Dems should avoid "confidence and supply"

Such a deal would satisfy neither supporters nor opponents of the coalition.

The idea of a "confidence and supply" agreement between the Conservatives and the Liberal Democrats, first mooted after the 2010 election, has re-entered political discussion after the almighty bust-up over House of Lords reform. The expectation on both sides is that the coalition will end in 2014, a year out from the next election, or possibly even earlier. Conservative MP Graham Brady,  the chairman of the 1922 committee, told Radio 4's Westminster Hour last night:

I think it would be logical and sensible for both parties to be able to present their separate vision to the public in time for the public to form a clear view before the election.

Of course, it is always possible that that moment of separation could come sooner. It's very difficult to predict when that might be.

The Lib Dems would then agree to support a minority Tory government in votes of no confidence ("confidence") and on any Budget (or "supply") measure.

It's arguable that the Lib Dems should have adopted such an arrangement from the start, rather than entered coalition with the Conservatives. Whilst Nick Clegg's party would still have had to support George Osborne's "emergency Budget" and the Spending Review, it could have avoided breaking its totemic pledge to cap tuition fees and could have voted against the government's NHS reforms.

But a confidence and supply deal with the Tories would now be the worst of all possible worlds for the Lib Dems. It would do nothing to placate those voters who despise them for propping up a Conservative government (indeed, this charge would have even more resonance), whilst antagonising those who believe they were right to enter coalition "in the national interest". Clegg's party would still have to vote for a Conservative Budget, brimming with welfare cuts, with even less guarantee of concessions elsewhere. A pact with the Tories would, to borrow a phrase, be a "miserable little compromise".

There are good arguments for the Lib Dems remaining in the coalition until 2015 and for them withdrawing completely before the next election. But there are none for entering the purgatory of confidence and supply.

Update: Academic Tim Bale, the author of the excellent The Conservative Party from Thatcher to Cameron, has alerted me to his research on the subject, which confirms that "confidence and supply" is frequently a curse for small parties.

The coalition is now likely to end before 2014. Photograph: Getty Images.

George Eaton is political editor of the New Statesman.

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The global shipping slowdown hints at a recession around the corner

Instability in China and tumbling commodity prices have devastated the world’s freight providers – a strong indicator of trouble to come.

This is beginning to have the feel of 2008 all over again. Policy makers around the world are in denial once again as global stock markets dive. In 2008, the slowing of the world's biggest economy – the US – sent the global economy into a tailspin. The concern now is that the slowing of the second-largest economy, China, may well have similar global effects. Chinese growth, which averaged 10 per cent for three decades through to 2010, has decelerated for five straight years and in 2015 slowed to 6.9 per cent, its lowest rate in a quarter of a century. The IMF is forecasting that Chinese growth will slow further to 6.3 per cent in 2016 and 6 per cent in 2017, which may well be overly optimistic. There is already speculation that China’s banking system may see losses even larger than those suffered by US banks during the last crisis.

The bad news from China appears to have already spread to the US, which has seen GDP growth slowing sharply in the last quarter of 2015. US industrial production and core retail sales are both falling, and there have been marked contractions in core capital goods shipments and private non-residential construction. Business fixed investment declined nearly 2 per cent last quarter. Despite the bad news, last week Federal Reserve chair Janet Yellen astonishingly claimed that “the US economy is in many ways close to normal”. By contrast, Ruslan Bikbov from Bank of America Merrill Lynch calculates that there is a 64 per cent probability the US is already in recession. My expectation is the next move by the Fed will be to cut rates.

Company profits are tumbling as commodity and oil prices decline. BP reported a $3.3bn fourth-quarter loss last year while Exxon Mobil reported a 58 per cent fall in its quarterly profit. It isn’t just oil companies. Last week, Rio Tinto – the world's second biggest mining company – reported profits down 51 per cent after commodity prices collapsed amid slowing growth from China. Company profits are also suffering due to a big decline in the amount of freight being moved, especially to and from China. Moeller-Maersk, the Danish conglomerate and the world’s biggest container-ship operator by capacity, last week reported a fourth-quarter net loss of $2.51bn.  

DP World, one of the world’s biggest port operators, also says that global volume has slowed sharply. It reported that volumes at its ports rose by 2.4 per cent last year, compared with 8 per cent growth in 2014. Data provider Container Trades Statistics said this week that Asia-to-Europe trade fell nearly 4 per cent last year. Freight rates in 2015 averaged $620 per container on the Asia-to-Europe trade route. Typically, ship operators need more than $1,000 to break even. In February, the cost of moving a container from Shanghai to Rotterdam fell to $431, barely covering fuel costs. Figures released by the Shanghai Shipping Exchange show that the country’s 20 largest container ports grew by 3.7 per cent over 2014, compared to 5.5 per cent the previous year. The Hong Kong Port Development Council reported that throughput at the port of Hong Kong fell by 9.5 per cent in 2015.  

The Baltic Dry Index (BDIY) – an index of the price for shipping dry goods such as iron ore and coal (oil is wet) as shown in the chart below – is at a record low of 290. It is down 75 per cent since its recent peak in 2015 and down 98 per cent from its peak of 11,793 points in May 2008. The collapse to 772 by 5 September 2008 (a week before Lehman Brothers failed) presaged the global recession and it is falling again. Capesize vessels, which are too big to get through the Suez or Panama canals, had an average daily hire last week of $1,484, compared with a peak of $233,988 in June 2008. Even though there is an oversupply of ships, global demand is collapsing.

The International Air Transport Association (IATA) released figures for global air freight, showing cargo volumes expanded 2.2 per cent in 2015 compared to 2014. This was a slower pace of growth than the 5 per cent recorded in 2014. This weakness apparently reflects sluggish trade growth in Europe and Asia-Pacific. “2015 was another very difficult year for air cargo,” said Tony Tyler, IATA’s Director General and CEO. “Growth has slowed and revenue is falling. In 2011 air cargo revenue peaked at $67bn. In 2016 we are not expecting revenue to exceed $51bn.”

The current contraction in rail freight is apparently reminiscent of the drop that started at the end of 2008 and carried on into 2009. China's rail freight volumes fell by a significant amount last year. According to the National Development and Reform Commission (NDRC), volumes fell by 11.9 per cent, a further increase on the 2014 slowdown, when traffic declined by 3.9 per cent.

In the western US farm belt, grain trains are so abundant you can’t give one away. Since the middle of last March, carloads of agricultural products, chemicals, coal, metals, autos and other goods have declined every week. Shipments of US coal, the biggest commodity moved by rail, declined 12 per cent in 2015, according to the Association of American Railroads. The cost of carrying spring wheat from North Dakota to the Pacific coast has dropped by a third in the past two years. In early 2014, grain companies with a train to spare could command $6,000 per car above the official railway tariff, traders say. Today, to avoid hefty contract cancellation fees, they are paying others to use their unwanted trains.

Manufacturing output in the UK fell for each of the last three months and is down 1.7 per cent over the year. The overly optimistic Monetary Policy Committee is forecasting GDP growth of 2.2 per cent (2.4 per cent) in 2016; 2.4 per cent (2.5 per cent) in 2017 and 2.5 per cent (2.4 per cent) in 2018 (the latest, broadly similar, OBR forecasts in parentheses).

So all is well then? Probably not. Mark Carney has run out of ammunition with the Bank Rate at 0.5 per cent, compared with 5.5 per cent in 2008, and has little room to manoeuvre. Negative rates and more quantitative easing, here we come. George Osborne has never explained what he would have done differently in 2008 – his plans for a budget surplus are already in disarray as the economy slows. I am not saying a recession is going to happen any time soon, but it well might.

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