The British Chambers of Commerce latest survey makes bleak reading. Small businesses, which were very chirpy about the outlook only a month ago, are suddenly full of fear, reporting falling orders. The BCC itself has become the latest to signal recession.
There were Wall Street analysts telling us the US was in recession at the beginning of the year. Instead, so far we have just had a sharp slowdown. There have been doomsters calling recession for the UK this year, but so far we have had two quarters of painfully slow growth. I am holding to my forecast that we might get by without a full recession in the US, where they have taken action with low interest rates and tax rebates to try to turn the economy round. The UK is now wallowing from a monetary authority that is getting it wrong both ways – too loose on the way up, and now too tight on the way down, so it is a closer call here.
Within the overall pattern of no growth or slow growth, certain sectors will experience a very painful recession. In both economies property, building and construction are in freefall, and banking is going through a nasty squeeze. With a low dollar and falling pound both economies should see better export performance, as their manufacturers are priced back into world markets during an inflationary period.
The situation in the UK is both ameliorated short term by excessive public spending, and made worse in the medium term (two years) by the over borrowing of the public sector to pay the ballooning bills. Yesterday in the Commons it was Supplementary estimates day, when the government seeks Parliamentâ€™s approval for some of the overruns so far this year. We were only allowed to debate concessionary fares and the science budget. The more interesting estimate before us was the stonking Â£5,300 million extra cash estimate for Northern Rock resulting from the transfer of a Bank of England loan that previously had not appeared in the figures. No Treasury Minister was on hand to give us an update on how big the trading losses and redundancy costs are likely to be, and how long it will take to get the loans back that the Treasury and Bank have extended. You donâ€™t get much explanation for Â£5.3 billion from this government! It is typical of a regime that spends other peopleâ€™s money as if there were no tomorrow, and now thinks borrowing any amount it likes is fair game. They may discover the day of reckoning for their excess comes before the General Election.
In todayâ€™s Independent there are rumours of Â£7.5 billion of overrun on the public accounts. The way this government is spending, I think the final total above budget this financial year will be higher than that. The short term impact on activity will be far less than the medium term adverse impact from the higher interest rates and lost confidence as the governmentâ€™s financial plans unravel. If only the PM would bring back Prudence, we would have some better options.
In the meantime there is action the government should take to fight recession. It should press ahead with the permits, licences and competitions necessary to organise large scale programmes to increase transport, energy and water capacity. It is an ideal time to do it, when the construction industry is facing large cuts in workload and workforce. That is something we could all agree about, and something which would help UK competitiveness in the next upswing.