Economic Update: July/August 2009 Professor Joe Nellis Steve Macaulay Welcome to the latest economic update from Professor Joe Nellis. Now Joe, as an economist, this crisis must have led to lots of debate within economic circles, how is that debate going? Joe Nellis Well, it’s as if we have gone back to the 1970s where we had almost two camps: we had the Keynesians – those who believe in government spending stimulating the economy. In other words, spend, spend, spend your way out of recession. The other camp, of course, are the monetarists or what we also call the Ricardians – the old monetarists, who believe that government spending is actually not good in the long run because it drives up interest rates, it drives up long term interest rates. And therefore it crowds out, it squeezes out, private sector investment. So we are almost back 30 years ago and I really thought we had left that alone; I thought we had achieved a consensus. But of course, a crisis creates different camps and that is what has happened. Steve Macaulay Some people say you economists should hang your head in shame; that it has all gone wrong and nobody is holding their hand up and saying so. Joe Nellis Quite a controversial viewpoint. We shouldn’t confuse economists with bankers and bankers aren’t necessarily economists. I think economics, like any profession, in a crisis you will end up with controversy. Even regarding swine flu, I am sure we have got people with different views about how we should tackle it. Remember this is the first global crisis of its kind for many decades, perhaps the 1930s. It is inevitable that there is therefore a questioning of our models, our viewpoints, of our policy recommendations. But at the end of the day we have to realise that the economists can only recommend; it is politicians who make decisions ultimately. And there always will be different views, of course. Steve Macaulay Now let’s get down to some specifics. How are things looking? I imagine you are going to depress me further. Joe Nellis I will give you a straight answer: yes and no. The economy is still in recession. Remember in the first quarter GDP fell by an astounding 2.4%. Steve Macaulay That’s the UK GDP? Joe Nellis The UK GDP. The City analysts expected GDP to fall in the second quarter but by only 0.3%, and that was a consensus view. Well the estimated outturn, which has to be confirmed yet, was actually a fall of 0.8%; in © Cranfield University July 2009 1 Professor Joe Nellis
other words, more than double what the City expected. So the decline has slowed down, but it is still a decline. So in a sense when I said yes and no, it is depressing but at the same time the super tanker hopefully is beginning to turn – not quite turn, but slow down and a turn will come hopefully in the next three to six, perhaps at most nine months, but I don’t expect that. Steve Macaulay So where do we go from here? If we are talking about businesses being starved of cash, we are talking about unemployment going up – there doesn’t seem much positive news going on here? Joe Nellis Well there is some positive – and I will come back to the first part of your question. The housing market is beginning to show some signs of revival, but again let me be cautious. In June there were approximately 35,000 mortgage approvals. Now that is an increase – a quite significant increase actually, but still way, way below the peak of last March, around about half of that peak value. But nevertheless, it’s the first sign of recovery in the market. At the same time there is some serious bad news, as you implied. Construction over the year as a whole, on an annual basis, has fallen by almost 15%. That is a serious decline. And manufacturing by something around 12‐13%. So we are not yet out of trouble, but as we look towards the third quarter and the fourth quarter, we would expect to see that –0.8% perhaps to go to even 0 or even positive growth. I think the real issue, and we have mentioned this on previous occasions, is yes we will turn this corner; the real challenge will be what happens 12 to 18 months from now when tax increases and government spending kicks in which inevitable given the size of our government deficit. And we are concerned about the danger of this rather unusual term, the W recovery – in other words, down up, but then down again as a result of the squeeze from the government sector, not from the consumer or corporate sector. That is the real challenge ahead for us. Steve Macaulay Can you give a brief picture of the international context? Joe Nellis Yes, well in the US, again, the housing market in the US is coming back quite strongly. Sales have surged for the fourth or fifth month in a row. So the US seems to have turned a corner, but we expected that. They were first into recession, we think they are now coming out of it, but let’s not get too excited about that. China and India are still growing strongly; well not as strongly as they would like, but growth of 5, 6, 7% is excellent. Even this morning you may have heard the Bank of China – the third biggest bank in the world – is now looking to lend into the UK market. What an opportunity for those emerging markets which have high savings ratios and therefore lots of © Cranfield University July 2009 2 Professor Joe Nellis
capital to lend to begin to cherry pick around the world. And I think we are going to see that as a significant trend in years to come; the emergence of large banks such as the Bank of China, which we normally expect to find in our economy, beginning to expand their business throughout the globe. Steve Macaulay So, Joe, if I were to ask you to sum up where we are in a sentence or two, what would you say? Joe Nellis The patient is still very sick, but getting better. And if we are patient, and we have to be patient, and we hold tight in the next three to six months the patient will be recovering, not yet back to where he or she was, and that will take several years. But things will look a lot brighter this time – well next year, significantly brighter. But by the turn of the year I think we will feel that the worst is over. Steve Macaulay Well that is at least something. Thank you very much, Joe. Joe Nellis Thank you. © Cranfield University July 2009 3