The Christchurch earthquake and the need for flexible thinking
As Melbourne debates the merits of the myki travel card and New Zealand recovers from disaster, some
As Melbourne debates the merits of the myki travel card and New Zealand recovers from disaster, some thoughts on George Osborne’s UK growth strategy.
Another week, another continent. I have been awake since 3.30am, having arrived in Melbourne, Australia, after the long haul from south-west Florida - a four-hour drive from my house to Orlando, followed by a five-and-a-half-hour flight to Los Angeles, then a 15-hour flight. It's not great for the body clock. And I'm only here for three days.
Taxi drivers, I find, can be a source of useful information about a local economy. The driver who picked me up from Melbourne Airport happily told me about the failings of the city's version of the London Oyster card, known as the "myki". He told me that it was no improvement on having clippies on the buses and trams, despite having cost many millions. He was right: the total cost of the system is around A$1.35bn (£840m), including A$494m for start-up and between A$50m and A$55m per year to run. It was scheduled to launch in March 2007 but is still not fully operational. On 28 December last year, the newly elected government in the state of Victoria announced that it would halt any further roll-out until an independent audit was completed.
My driver was irritated that the operators had been paid large bonuses even though the system wasn't working properly. Sound familiar? The Royal Bank of Scotland, whose biggest shareholder is the British government (and thus the taxpayer), has announced a loss of £1.1bn for 2010 but is paying out bonuses of £950m. Lloyds is also paying its retiring boss, Eric Daniels, a big bonus. The Deputy Prime Minister, Nick Clegg, had previously warned that the government would not stand on the sidelines if banks paid out lavish bonuses. Then he went skiing and "forgot" he was running the country.
Australia has prospered because it has dug up big chunks of its precious resources and shipped them to China. Employment is more than 6 per cent higher than it was at the beginning of 2008, while in the UK there has been a 1.3 per cent fall. And output is 5.5 per cent higher, compared to the UK's decline of 4 per cent. Yet the widespread flooding and the cyclone seem to have had an impact on an economy that had already started to slow. GDP growth was 1.2 per cent in the second quarter of 2010 but it fell sharply to 0.2 per cent in the third quarter. The moral of the story is that unexpected things happen and they are mostly bad.
But occasionally they can be good, as it was with the Victorian gold rush. On 20 July 1851, Thomas Peters found gold at what is now known as Specimen Gully. This find was announced in the Melbourne newspaper the Argus on 8 September 1851. Further discoveries were made in other parts of Victoria and the population of Melbourne grew swiftly as gold fever took hold. More immigrants leaving the UK in 1852 bought tickets to Melbourne than to any other destination in the world. The discovery of gold was good for employment. But economic policymakers are not usually so lucky.
On the journey over, I received an email from New Zealand's chief statistician, Geoff Bascand. He had news of a plan B. As a consequence of the earthquake in Christchurch, Statistics New Zealand has decided not to proceed with the census that was to take place on 8 March this year. Much of its census operations and staff are in Christchurch and the impact to their buildings and systems, Bascand said, "has been huge". It is hard to argue with his claim that: "Now is not the right time to be asking New Zealanders for information."
A third of the buildings in central Christchurch will need to be demolished and much of the city will be closed for months, at a time when New Zealand's economy, like Australia's, is showing signs of slowing again. In 2009, GDP grew by 0.5 per cent, but in the third quarter of 2010 growth fell to -0.2 per cent. Then came the earthquake in September and now another. An economic stimulus plan to aid the city's recovery is to be announced shortly.
That brings me to the UK. The GDP figures for the fourth quarter of 2010 couldn't possibly be that bad, said the commentators when the data was first published before Christmas. How could fiscal austerity compromise growth? These were the same so-called experts who had failed to forecast a recession in the first place. Sadly, that growth was revised down on 25 February (just as it was in the previous three quarters of 2010), from a drop of 0.5 per cent to one of 0.6 per cent. That is before the VAT increase and the spending cuts hit.
And oil prices have spiked again, primarily over fears of further disruption in the Middle East. Libya is a relatively small producer and a number of countries, including Russia and Saudi Arabia, have offered to increase production to make up for any slack. The worry is that growth will decline as people cut their spending on non-oil items.
Waiting for a miracle
In a recent forecast, the Bank of England's Monetary Policy Committee (MPC) made it clear - wrongly, it appears - that output would be revised upwards. This is a repeat of errors that the MPC made in 2008, when it assumed, in what is called its "backcast", that the published data understated how well the economy was doing. Look at the mess that got us into.
The MPC's resident clown Andrew Sentance even voted for an interest rate increase of 50 basis points - from 0.5 to 1 per cent. Two other inflation "nutters", Martin Weale and Spencer Dale, voted for a smaller increase of 25 basis points. In a speech on 24 February, Sentance said: "The recovery in the UK domestic economy does appear to be continuing. Though we should expect to see fluctuations in the rate of growth as the recovery proceeds, most of the indicators from the early part of this year point to a resilient economy." Wrong, as usual. Fortunately, Sentance's term on the MPC ends after only three more meetings, before he can do lasting damage to the economy. Just think what an interest rate increase would do to all those people on tracker mortgages.
In the Budget on 23 March, George Osborne will have to lower his growth estimates. The only growth strategy he has right now is to hope for good news, such as a gold strike in the Welsh hills. U-turn, here we come. And David Cameron will then say that he is "really, really, really, really sorry" for another screw-up. The coalition is taking the myki.
David Blanchflower is NS economics editor and a professor at Dartmouth College, New Hampshire, and the University of Stirling