Economic Update: September 2009 Professor Joe Nellis Steve Macaulay Welcome to the latest economic update from Cranfield. As usual we have got Professor Joe Nellis in the studio. Now Joe, it’s twelve months since Lehman Brothers went bust, we have probably seen the biggest economic recession in the world since the Great Depression. Give me your forensic view on the economic landscape now. Joe Nellis Well you are right to say, Steve, it was the biggest recession since, well, the Great Depression and perhaps even before that. Well, the fact is that things are getting better, but let’s be cautious and realistic. We have had a very sick patient and the patient is showing signs of recovery. So there are some green shoots, but of course it’s not universal. Certain countries are doing better than others, we know Germany and France have picked up in the last few weeks; America is showing some positive signs and the official figures for the UK which are due out in about six weeks, we hope, will show some positive sign of growth. But it is early days yet; but the good news is, we think we are through the worst recession. Steve Macaulay Now if we are through the worst, is it over and can we start to pick up again? One of the things that I have heard is that we are on a bit of a ski slope; we have gone down, we might plateau, but there is further to go yet. What is your view? Joe Nellis I totally agree with that. There is a need for caution and for lots of reasons. Let me give you some hard facts first of all. From the peak to the trough – the ski slope as you refer to it – in this recession we have seen GDP fall by more than 6%. If we compare that to the 1990s recession, GDP fell from peak to trough by 2.5%. We had that fall, more or less, in the first quarter of this year. So it is a little bit early to start being over optimistic. This has been such a severe recession it will take time and I guess the consensus forecast, apart from the outlying forecast – the consensus is that we will probably bump along the bottom for the next twelve months with some small signs of some positive growth figures along that twelve month period. Steve Macaulay Now we talked about a patient, a number of people are saying we are the sick man of Europe. I read the other day that our banking system is so fragile that we are on a par with Montenegro – what are your views on this? Knowledge Interchange Online© Cranfield University September 2009 1 Professor Joe Nellis
Joe Nellis It’s a little bit extreme to call us the sick man of Europe. We are sick, but I wouldn’t put it in such stark contrast. Yes, the City of London is absolutely central to our economy; there is nothing new in that. And therefore as a consequence, given that we have severe drop in the City’s business, then the economy is more affected. I think the real challenge for the City and for banking in general – and for the Central Bank – is with respect to how they are going to unravel this position? How are they going to unwind from the quantitative easing? Let me explain that briefly. The Bank of England during this period will inject in total something like £175bn worth of money into our banks by buying up assets and primarily government bonds. Now how they are going to unravel that situation is a question mark. That is not the situation in Europe. The ECB did not do this. The ECB provided short term liquidity, in other words loans to the banks , and as the banks recover in Europe, so they are repaying those loans. And therefore that situation will unravel and is unravelling quite quickly. The UK banking system is still locked into this huge liquidity problem because they have been bailed out by the Central Bank, which itself is sitting on a pile of assets which they hope they can sell back into the market. Until that happens then there will always be a question mark about are we the sick man of Europe. Steve Macaulay One of the things that inevitably is going to happen for the man in the street, for companies, for the economies, is that in the end all this debt has got to balance itself out. You have got to balance your books. Would you like to comment on that? Joe Nellis Absolutely. And this is the big question mark that is now arising in many aspects across the economy. It is what is being referred to as the rebalancing act: how are we going to balance the books? Balance the books in terms of the government, the public sector; in terms of the corporate sector and in terms of the personal sector. Let’s take each one in turn briefly. We have spoken already in previous interviews about the public sector debt mountain that has built up. That will take many years to rebalance in the sense that the repayment of debt will not happen for decades. And therefore, we will be indebted – or the public sector will be indebted – for years to come, which will restrict the freedom to do things such as increase public spending. Secondly, the corporate sector debt levels have grown significantly of course, including the banking sector. There are signs that that is being reduced slowly. So I am feeling more positive about the corporate sector balancing act and the stock market I think is reflecting that; not only in © Cranfield University August 2009 2 Professor Joe Nellis
terms of improved economic outlook, but also in terms of improved corporate outlook in terms of debt levels. But the third sector is the key one for me – and it’s the personal sector, the consumer, you and me, Steve. We have heard recently about there is a certain amount of debt repayment going on. Let’s be very clear what that means. This is essentially credit card debt; it is short term debt. That is a relatively small proportion of total personal debt which is dominated by mortgage debt and that has not come down very much, if at all. There is a real danger here; I’m back to this balancing act that I mentioned. Many people have now moved onto variable rate mortgages or higher rate fixes. If we do have any increase in interest rates in the future, those people on variable rates will see their debt repayments have to increase significantly. We are in a difficult position, therefore, in terms of personal debt. And the final point on this that I would like say is that recovery, if it is to be sustained – and we all hope it will be sustained – depends absolutely on demand. The consumer is king and I have said that many times. Until the personal, the consumer debt levels are rebalanced, are more affordable, then it would be over‐optimistic to suggest that the consumer will suddenly go out, borrow more money, spend, spend, spend and we then see growth being more sustainable. I don’t expect that. I think we have got at least twelve months and perhaps longer, until we see much stronger signs of sustainable growth. So I am cautiously optimistic, but not overly optimistic. Steve Macaulay So we have got balancing acts to consider, we have got ski slopes to go up and down and lots of questions. Joe, we will meet again in a month and pursue these further. Thank you. Joe Nellis Thank you. © Cranfield University August 2009 3