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Slasher and his pals are talking us into a recession

The role of a minister is to do no harm –– and yet the members of this coalition government seem int

On 24 May, George Osborne said in a speech that the coalition was aiming "to boost confi­dence in the economy". Sadly, that has not happened. Far from it - there has instead been a terrible collapse in business and consumer confidence. And I place most of the blame for this on the gang of four: Osborne, David Cameron, Nick Clegg and Chris Huhne, all of whom have talked the British economy down at every opportunity.

This coalition government did not campaign on a wild cutting agenda - indeed, the Liberal Democrats campaigned actively against it - and was given no mandate to implement one by the British people. It made up a story that cutting was essential if Britain was not to become like Greece, unable to borrow a penny again. That story is simply not true. The government continues to borrow at low rates, and even when there was talk of a Lib Dem-Labour coalition there was no spike in the cost of borrowing.

Big mouth strikes again

In its haste to score political points by blaming all the country's ills on Labour, the government has imperilled the recovery still further. Crazy talk of the need for austerity has made a recession inevitable. "We are shaping the economy of the future by promoting a pro-growth agenda," Osborne said in a speech at Bloomberg on 17 August. Not so far, you're not.

Consumption, in particular, is going to fall as fear of unemployment begins to bite. Sales in the second quarter at Asda were down 0.4 per cent, compared with 0.3 per cent in the first quarter, the first such decline since 2006. Andy Clarke, Asda's new CEO, has talked of a new "age of austerity".

Meanwhile, the Bank of England's agents reported: "Many contacts thought that consumer sentiment had softened, and that shoppers had begun to reduce expenditure in response to expected changes in taxes and concerns about job security." And despite figures showing that the German economy grew by 2.2 per cent, thanks largely to exports to the US and China, the second quarter of 2010 is likely to be the high point, as the world's two biggest economies have started to slow once more, which will inevitably have an impact on UK growth.

The most egregious example of badmouthing the economy was the damaging comments on 11 August by Chris Huhne, who, unlike the other members of the gang of four, has some background in economics and should know better. In a reprehensible press conference with the Tory party chair, Sayeeda Warsi, Huhne unwisely declared the economy to be "bankrupt" and, later, "shattered".

This is unadulterated nonsense and can only do harm to Britain's economic prospects. No wonder the Lib Dems' poll ratings are plummeting. My bet is that Huhne will be the first Lib Dem to leave the government, before even Vince Cable. It would have been better for the British people if Huhne had resigned in the spring when details of his affair became public.

Another example of a politician's comments damaging confidence was a remark made by the Economic Secretary to the Treasury, Justine Greening, who ludicrously described the UK economy as a "basket case" during a debate on the Budget in June. It's shameful. The role of a minister, like that of a doctor, is to do no harm. In future, Greening should engage her brain before opening her mouth.

The evidence for my claim that the coalition government has successfully driven confidence down is presented in the two charts below. These are based on what the consumer has been saying recently in surveys. The first chart plots the most recent data available from the Nationwide Consumer Confidence survey. Four series are plotted: the Consumer Confidence Index itself; the consumer spending index; the expectations index; and the percentage of people saying they expected there would be not many jobs available in six months' time.

blanchflower graph

It is worth noting that all four indicators have slipped, especially the jobs data and the spending index, since May 2010.

Confidence trick

The second chart plots data from the monthly surveys undertaken for the European Union by the analysts GfK. They are also the source for data on the fear of unemployment, which has also jumped since May.

Three series are plotted here: the Consumer Confidence Index; respondents' views on the general economic situation 12 months hence; and views on each respondent's own financial situation 12 months ahead. All three indicators fell from around February and then dipped sharply again from May, just when the leaders of the new government started talking the economy down.

The two charts tell the same story - consumer confidence is plunging fast. Business confidence is also collapsing. The business expectations indices from the purchasing managers' indices surveys covering services and construction showed record monthly falls in June. The indices remained weak in July.

Generally, steep changes in the expectations index are followed sooner or later by changes in actual economic activity. The Bank of England, in its Inflation Report for this month, also confirmed that "a number of surveys suggested that business and consumer confidence is slowing".

In his speech at Bloomberg, the Chancellor claimed that "the actions we took in the Budget have removed the biggest downside risk to the recovery - a loss of confidence". The data does not appear to be consistent with that claim.

David Blanchflower is a labour economist and a professor at Dartmouth College, New Hampshire, and the University of Stirling

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

This article first appeared in the 23 August 2010 issue of the New Statesman, Pakistan