Budget 2014: Britain’s false recovery is a credit mirage, unlike real recovery in the US
The UK has a current account deficit running at more than 5pc of GDP, the worst in a quarter of a century and by far the worst of the G7
By Ambrose Evans-Pritchard
5:05PM GMT 19 Mar 2014
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Fiscal tightening of 1pc of GDP each year has been mild by EMU standards Photo: PA
No vindication can be sweeter for George Osborne than Britain’s new role as a global safe-haven, an astonishing reversal from early 2010 when hedge funds were itching to attack the pound.
The cost of default insurance on British debt – measured by credit default swaps – is now below that of the US, France and Japan, and briefly slipped below Germany last week.
Sterling has ratcheted higher to $1.66 against the dollar, a tad too strong for the Monetary Policy Committee. David Bloom, from HSBC, says sterling is all of a sudden the “least ugly” currency in a world where even the Japanese and the Swiss are holding down their exchange rates. “There is nowhere else to go,” he said.
Yet he also warns, like other City veterans, that this intoxicating moment is not going to last. “UK growth is surviving on fumes, driven by a consumer credit boom. Britain has an enormous trade deficit,” he said.
The Chancellor told the House that Britain is now the growth star of the industrial world, galloping up to 2.7pc this year. The pessimists have had to apologise. Even the lordly IMF is admitting through gritted teeth that it failed to see the mini-boom coming.
Yet growth is not the salient indicator. What may matter more is a current account deficit running at more than 5pc of GDP over recent months, the worst in a quarter of a century and by far the worst of the G7. It is not a “healthy” deficit driven by imports of machinery. It is a consumption spree.
The household savings ratio has drifted down from 8pc two years ago to 5.4pc today. Output per hour has been falling and is now 21 percentage points below the G7 average, the widest productivity gap since 1992, according to the ONS.
America’s recovery has an entirely different feel. The shale revolution has slashed energy imports and powered a manufacturing revival. The US current account deficit fell to a 14-year low of 1.9pc of GDP last year. The US budget deficit is already below 3pc, and the US debt ratio has already stabilised.
The brutal reality is that Britain is still running the highest budget deficit of any major country in Europe at 6.7pc of GDP. That is not Mr Osborne’s fault. Labour let the public sector run amok. It ran a recklessly loose fiscal policy at the top of the pre-Lehman boom. The deficit mushroomed to 11pc when the storm hit, the legacy from Hell.
The Office for Budget Responsibility forecasts that the deficit will come down to 5.5pc next year, 4.2pc the year after and ending in a surplus by 2018/2019. That is pure conjecture.
The OBR’s Robert Chote says a pick-up in business investment – from catastrophic levels – has at last given the economy some momentum. “It’s encouraging, but history could be rewritten again," he said. There is a high risk that it will be.
The global credit cycle – already five years old, and long in the tooth – may slow as both China and the US tighten monetary policy. It may roll over altogether. That would leave Britain facing a fresh downturn with borrowing already running at £95bn a year.
It is cheeky for the Chancellor to pose as the stern enforcer of discipline, to proclaim that “we held our nerve”. Fiscal tightening of 1pc of GDP each year has been mild by EMU standards. This is, in my view, the correct therapeutic dose. But it is scarcely austerity.
In fairness to Mr Osborne, he admits that the recovery is built on very fragile foundations. “This country still borrows too much, we still don't invest enough, export enough or save enough," he said.
But what has he done about it? It is rich for the Coalition to pivot now towards manufacturing and exports, four years into its term. Historians will ask whether Mr Osborne wasted his chance to wean the economy off shopping malls, relying for too long on the old formula of easy credit to flatter the figures.
Britain has at least avoided the trap of mass unemployment blighting half of Europe. The jobless rate has fallen to 7.2pc. It is 12pc in the eurozone.
The mix of fiscal retrenchment offset by uber-loose money from the Bank of England has been vindicated to a degree, as it was in previous episodes of national trauma after leaving the Gold Standard in 1931 and leaving the ERM in 1992. The Keynesian critique has failed to hit its mark.
What Mr Osborne has failed to do is to alter the fundamental character of the British economy. Why does Britain place number one for access to credit on the World Bank’s Ease of Doing Business Index, but below the OECD average at 28 for starting a new business?
He should have smashed the mould with deep changes in the way British society organises itself. Perhaps he should have launched his industrial policy earlier, exploiting super-low borrowing costs to rebuild Britain’s infrastructure, energy and technology base at bottom of the slump. On that the Keynesians were right. It is very late in the day now.
Mr Osborne closed his speech with a large claim: "With the help of the British people, we're turning this country around." The jury is out on that.
The household savings ratio has drifted down from 8pc two years ago to 5.4pc today. Output per hour has been falling and is now 21 percentage points below the G7 average, the widest productivity gap since 1992, according to the ONS.
America’s recovery has an entirely different feel. The shale revolution has slashed energy imports and powered a manufacturing revival. The US current account deficit fell to a 14-year low of 1.9pc of GDP last year. The US budget deficit is already below 3pc, and the US debt ratio has already stabilised.
The brutal reality is that Britain is still running the highest budget deficit of any major country in Europe at 6.7pc of GDP. That is not Mr Osborne’s fault. Labour let the public sector run amok. It ran a recklessly loose fiscal policy at the top of the pre-Lehman boom. The deficit mushroomed to 11pc when the storm hit, the legacy from Hell.
The Office for Budget Responsibility forecasts that the deficit will come down to 5.5pc next year, 4.2pc the year after and ending in a surplus by 2018/2019. That is pure conjecture.
The OBR’s Robert Chote says a pick-up in business investment – from catastrophic levels – has at last given the economy some momentum. “It’s encouraging, but history could be rewritten again," he said. There is a high risk that it will be.
The global credit cycle – already five years old, and long in the tooth – may slow as both China and the US tighten monetary policy. It may roll over altogether. That would leave Britain facing a fresh downturn with borrowing already running at £95bn a year.
It is cheeky for the Chancellor to pose as the stern enforcer of discipline, to proclaim that “we held our nerve”. Fiscal tightening of 1pc of GDP each year has been mild by EMU standards. This is, in my view, the correct therapeutic dose. But it is scarcely austerity.
In fairness to Mr Osborne, he admits that the recovery is built on very fragile foundations. “This country still borrows too much, we still don't invest enough, export enough or save enough," he said.
But what has he done about it? It is rich for the Coalition to pivot now towards manufacturing and exports, four years into its term. Historians will ask whether Mr Osborne wasted his chance to wean the economy off shopping malls, relying for too long on the old formula of easy credit to flatter the figures.
Britain has at least avoided the trap of mass unemployment blighting half of Europe. The jobless rate has fallen to 7.2pc. It is 12pc in the eurozone.
The mix of fiscal retrenchment offset by uber-loose money from the Bank of England has been vindicated to a degree, as it was in previous episodes of national trauma after leaving the Gold Standard in 1931 and leaving the ERM in 1992. The Keynesian critique has failed to hit its mark.
What Mr Osborne has failed to do is to alter the fundamental character of the British economy. Why does Britain place number one for access to credit on the World Bank’s Ease of Doing Business Index, but below the OECD average at 28 for starting a new business?
He should have smashed the mould with deep changes in the way British society organises itself. Perhaps he should have launched his industrial policy earlier, exploiting super-low borrowing costs to rebuild Britain’s infrastructure, energy and technology base at bottom of the slump. On that the Keynesians were right. It is very late in the day now.
Mr Osborne closed his speech with a large claim: "With the help of the British people, we're turning this country around." The jury is out on that.
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