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3 February 2011

A double dip is still a possibility

Don't listen to the growth-deniers -- it's too early to celebrate.

By David Blanchflower

The growth-denier Jeremy Warner’s Telegraph recent blog postings have caught my attention. On 29 January, Warner made a ridiculous claim.

Without action, the markets would soon be charging the UK government the same penalty interest rates to borrow as faced by Spain.

First answer: the UK is demonstrably not Spain, as it isn’t Greece, Ireland or Botswana.

1) Spain currently has an unemployment rate of 20.2 per cent and a youth unemployment rate of 43 per cent, compared with 7.9 per cent and 20 per cent, respectively, in the UK.

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2) Spanish ten-year bond yields today are 5.17 per cent, compared with 3.77 per cent in the UK. But even if bond yields were to rise to 5 per cent, that wouldn’t be a disaster, given that the country with the most solid AAA credit rating of all — Australia — currently has bond yields of 5.6 per cent.

3) We have our own central bank and a currency that we are able to depreciate and Spain is stuck in monetary union.

4) If growth disappoints, as it surely will, that will not satisfy the bond markets. That will likely turn them against the UK, given that Osborne has no strategy for growth, as Richard Lambert of the CBI made clear.

Today Warner published another blog with the daft headline, “Panic over. No double dip”. Let’s hope he is right. This is what he said.

Despite the shock setback in fourth quarter output, the recovery seems to be broadly on track . . . One set of positive PMIs does not a summer make but they should at least temporarily silence those who argue that the government is taking big risks with the economy by cutting the deficit so fast. As has frequently been pointed out, we now have two polar opposite approaches to recovery economics. In the US, they are keeping their foot flat down on the fiscal accelerator. In Britain, there is a much more urgent attempt to address the deficit. Personally, I’ve never believed Britain has any option in the matter. We don’t have the luxury of America’s virtually limitless capacity to borrow. But even assuming there was a choice, the intellectual case for public-sector spending cuts remains a powerful one. We’ll see which approach works best but those claiming that the data supported the American view will this morning be feeling a little deflated.

Second answer.

1. Unfortunately, it doesn’t appear that he actually read the Markit/CIPS PMI data releases, which “are consistent with a quarterly rate of GDP growth of 0.4 per cent”. This is almost exactly the rate of growth forecast by NIESR for 2011 of 1.5 per cent yesterday and much less than the government has planned for. This is in contrast for the hoped-for rates of around 0.6 per cent, forecast by the OBR. Growth that low would inevitably cause big jumps in unemployment and would add to the pressure on the government to slow the speed of their mistaken austerity programme. The issue is not so much about double dip but about slow growth that will not be sufficient to get unemployment down. All of this, of course, before the VAT increase hits and the public-sector job cuts start arriving.

2. Worryingly, employment in both construction and services, according to the PMIs, continues to fall.Chris Williamson, chief economist at Markit, said: “Looking ahead, service providers appear nervous about the future, cutting payroll numbers again in January, despite reporting an improvement in business confidence about the year ahead. This is especially disappointing as higher employment is likely to be a necessary ingredient of a sustainable economy recovery that is not overly dependent upon exports.”

3. Today’s data from the US is pretty encouraging. The service industries expanded at the fastest rate since 2005, despite the dreadful weather. New York has had historic amounts of snow. The Institute for Supply Management’s index of non-manufacturing businesses rose to 59.4, exceeding the median forecast in a Bloomberg News survey, after December’s 57.1. There was also evidence of a big decline in first-time jobless claims, a faster pace of productivity and an unexpected increase in orders placed with US factories. The US grew at a 3.2 per cent annual rate in the fourth quarter as consumer spending climbed by the most in more than four years. In contrast, GDP growth in the UK for the fourth quarter declined at an annualised rate of 2 per cent. Inflation in the US is low and consumer confidence is improving, unlike in the UK where it has collapsed.

4. The hoped-for lift from exports may not be sustained if the latest data from the Baltic Dry Index are to be believed (see graph). This is often held to be a good indicator of world trade as it indicates the cost of shipping dry goods such as iron ore. It has dropped 50 per cent since early December 2010, despite booming commodity prices. It has a high correlation with the Shanghai equity composite and there are concerns that this is a sign that China’s real economy is weakening. It seems that China’s exports are slowing. So the much hoped for boost to UK’s net trade may not materialise.

It’s probably a little early to celebrate, Jeremy. The data do seem to support the ‘American view’ – and mine! But who cares about the data? Actually, I do. And you should too.