Chris Clifford: Keeping a perspective on the doom and gloom
Oct 9 2008 By Chris Clifford
Official data last week showed that the UK economy saw no growth in the second quarter of 2008 while the gap in the current account widened to its highest level in almost a year.
The figures were the worst for 16 years and many analysts maintained a downbeat forecast for the UK economy.
While the CBI is realistic about the tough times that lie ahead it isn’t all doom and gloom. In a recent speech to businesses in the East of England, Director General Richard Lambert spoke of the ‘important stabilising forces at work in our economy’ and the anger that business is feeling when people talk our economy down.
While business recognises the challenges we all face, it remains confident about the future. And while consumer confidence is lower than it was at the time of the 1980s and 1990s recessions, nearly every other economic measure looks a great deal healthier than it did back then.
We have more people in work than we did then. We can’t ignore job losses in some sectors but we need to keep them in perspective – financial services are suffering but they represent about three percent of UK employment.
Back then the retail price index hit levels above anything in the foreseeable future; as a consequence interest rates rose steeply. This time round interest rates are five per cent.
While inflation is running uncomfortably high, there is a good chance it will peak in the next few months. It may be too, that the surge in energy and other commodity prices has already passed its peak.
Demand in the economy has slowed sharply; so greater supply should help to pull down the pace of inflation this time next year.
If all of this were sustained there would be a case for the Bank of England to move bank rates down by the year-end – which would certainly help household spending.
Weak sterling is holding down imports and pushing up exports so an improvement in the trade figures would also provide support for our economy.
All of this points to a mild, shallow recession and suggests we will turn a corner by 2010.
Of course we may face yet further financial turbulence which will impact on the broader economy but ultimately it will all come down to confidence.
Banks need to get back to doing their jobs with confidence. Businesses need to be confident that they can focus on economic recovery and be incentivised to invest in their human capital. And that in turn is critical if consumers are to retain confidence in economic affairs.
We also need confident action from government. It acted promptly in the case of HBOS and Bradford and Bingley and the Tories have promised their full support in enacting the financial stability legislation, which will shortly be making its way through Westminster.
Central bankers have a key role to play. The system needs to be flooded with liquidity in order to keep the wheels turning. While some argue that this presents a moral hazard, as Richard Lambert commented; “given the current crisis of confidence, that concern comes second to keeping the show on the road.”
Our priority is to restore stability to the system. And we need to keep a sense of perspective – our economy is going through a painful but necessary process of rebalancing itself.
As we face the future we need to remember three things - business cycles come and go; we have real forces for stability in our economy; and we need to keep our faith in the market economy – capitalism is extremely resilient.
* Chris Clifford is regional director of the CBI West Midlands
