SM
JN
SM
JN
Economic   Update:   June/July   2009
Professor   Joe   Nellis
Welcome   to   the   latest   economic   update   from   Cranfield.
As   before,   in   the   studio   today   is   Professor   Joe   Nellis.
Now   Joe,   there   are   two   things   that   most   people   want   to   know:   what   is   the   current   situation,   for   instance   is   it   getting   better,   is   it   getting   worse?
And   then   secondly,   where   is   all   this   heading;   what   is   it   going   to   look   like   when   all   this   crisis   is   over?
So   I   would   like   to   start   off   with   having   a   look   now   at   where   are   we,    particularly   in   the   UK.
So   let’s   start   off   there;   where   are   we?
OK,   Steve,   there   is   a   little   bit   of   good   news.
The   recession   is   slowing   down,   in   other   words   GDP   is   falling   more   slowly   that   before.
That   is   good   news   and   it   shouldn’t   be   a   surprise   really   –   supertankers   do   turn   eventually.
And   we   are   going   to   start   to   see   this   in   the   next   three,   four,   five,   six   months.
But   we   won’t   see   positive   growth   I   think   until   the   end   of   the   year   and   early   next   year.
There   are   three   reasons   why   this   is   inevitable   –   why   we   are   seeing   an   improvement,   a   less   sick   patient.
The   first   one   is   obvious;   I   think   the   fear   of   a   great   depression   has   now   gone   away.
We   are   not   looking   at
Armageddon.
And   that   helps   business   confidence,   it   helps   consumer   confidence.
Secondly,   again   not   surprisingly,   the   scale   of   government   stimulus,   government   spending   and   monetary   stimulus   and   quantitative   easing.
It   would   be   a   shock   if   they   were   not   helping   the   economy   obviously.
And   the   third   one,   which   is   really   a   core   economic   fundamental,   is   that   companies   have   been   destocking   their   inventory   levels   for   some   months.
As   stocks   go   down,   so   output   begins   to   be   increased.
That   is   happening   very   slowly,   but   it   will   start   to   take   effect.
And   it   is   a   gradual,   natural   adjustment.
Now,   I   hear   reassuring   words   like   that   and   then   up   pops   something   like   the   OECD   saying   hey,   we   have   really   got   huge   debts   here.
We   have   got   other   people   saying   the   banks   are   still   in   a   dicey   state   –   you   could   get   one   of   them   going   down   still.
How   do   you   respond   to   that?
First   of   all   the   OECD   is   quite   right;   the   UK   has   the   reputation   –   the   reality   is   that   we   now   have   the   highest   government   debt   level   of   any   of   the   G20,   the   twenty   biggest   industrialised   economies.
That   is   a   fact.
And   that   is   going   to   hold   back   the   UK   growth   for   many   years   to   come.
So   I   wasn’t   trying   to   be   over ‐ optimistic;   what   I   was   saying   was   we   are   coming   out   of   perhaps   the   deepest   water,   but   we   are   still   going   to   be   in   deep   water.
And   secondly   banks;   I   am   less   concerned   about   another   bank   going

SM
JN
Professor Joe Nellis bust.
I   am   more   concerned   that   bank   lending   is   still   not   picking   up   –   the   heart   is   still   not   pumping   the   blood   around   the   economy.
And   we   see   that   particularly   in   the   mortgage   market.
Yes   there   is   talk   about   house   prices   rising   a   little   bit;   I   wouldn’t   get   too   excited   about   it.
What   we   really   need   to   look   at   is   bank   lending   in   the   mortgage   market   and   there   we   are   not   seeing   a   massive   pickup,   the   reason   being   that   a   lot   of   the   traditional   bank   lending   is   remortgaging   –   that   is   where   the   volume   comes   from.
Lending   for   remortgaging   purposes   is   not   rising.
And   again   the   reasons   are   that   banks   are   reluctant;   their   risk   appetite   has   been   diminished.
And   thirdly,   of   course,   the   interest   rates   are   being   charged   and   the   choice   and   choice   of   products   is   holding   back   the   markets.
So   caution   on   several   fronts.
Yes,   things   are   not   as   bad   as   they   were   three   months   ago,   but   they   are   still   very   fragile.
Now   let’s   have   a   look   to   the   future.
You   can   give   me   the   economist’s   perspective;   we   have   heard   politicians,   regulators,   business   all   telling   rather   conflicting   stories.
Now   what   do   you   see   is   happening   on   the   global   economy,   as   well   as   the   UK,   that   will   look   towards   the   future?
Well   I   am   not   a   politician   therefore   my   viewpoint   is   totally   objective.
There   are   a   number   of   major   things   to   watch   in   the   coming   years.
Of   course   in   the   UK,   and   in   many   other   developed   countries,   there   will   be   sustained   squeezes   on   government   spending,   particularly   capital   investment   spending.
So   less   spending   on   roads,   on   schools,   on   hospitals;   and   that   will   not   be   short   term   –   that’s   a   long   term   issue.
At   the   same   time   there   will   be   increases   in   taxation,   particularly   personal   tax   to   pay   back   the   debt.
And   again,   not   short   term,   this   is   probably   ten,   fifteen   years   into   the   future   where   we   will   feel   this.
The   second   point,   apart   from   the   government   situation   in   many   countries,   I   think   in   the   UK   especially   no   one   can   claim   anymore   that   we   are   seeing   the   end   of   boom   and   bust.
I   think   that   comment   has   now   been   banned   from   dictionary   for   many   years   to   come.
Thirdly,   a   fundamental   shift   which   has   been   happening   for   some   years,   but   this   has   been   a   real   shock   –   I   think   the   trust   in   the   banking   sector   has   been   damaged   for   generations,   somewhat   like   the   MPs   expenses   in   the   UK.
And   this   is   to   a   large   extent   the   Anglo   Saxon   world   of   banking;   the   US   and   the   UK.
And   that   is   going   to   take   a   long   time,   if   it   ever   will   recover.
The   next   item   I   would   point   out   to   in   terms   of   the   longer   term   issues,   the   medium   to   longer   term   issues,   is   the   question   about   inflation.
Some   commentators   think   we   are   going   to   see   significant   inflationary   pressures   in   the   next   two   or   three   years   because   of   the   massive   fiscal   and   monetary   expansion.
Others   say   no,   that   inflationary   pressures   will   not   be   significant   because   as   inflation   is   forecast   to   rise   central   banks   will   put   on   the   brakes;   they   will   raise   interest   rates,   governments   will   raise   taxes   even   more,   global   competition   will   hold   back   inflation.

SM
JN
SM
Professor Joe Nellis
And   a   similar   point   related   to   that,   and   the   next   point   I   would   make   concerning   the   global   economy   is   after   this   crisis   –   during   and   after   this   crisis   –   the   so   called   Chindia   effect,   the   China   plus   India   effect   in   terms   of   the   relative   balance   of   power   in   the   world,   that   is   going   to   change   even   faster.
I   think   China   and   India   relative   to   the   old   world,   are   going   to   grow   even   more   quickly   than   we   expected   because   the   old   world   has   had   quite   a   shock.
So   what   are   the   implications   of   this?
Well   the   balance   of   power   is   changing;   the   rise   of   China   and   India   will   accelerate,   as   I   have   just   said.
But   I   think   in   particular   the   UK’s   role   in   the   world   economically   is   going   to   diminish   faster   than   we   would   have   expected   –   and   in   a   sense,   that   is   a   natural   trend.
Relative   sizes   are   changing   quickly.
But   with   economic   power   comes   political   power,   again   it’s   a   trend.
We   are   seeing   that   already;   China’s   influence   is   increasing   politically.
But   I   think   given   the   shock   that   American,   primarily,   alongside   the   UK   banking   sector   has   inflicted   on   the   world   I   think   we   are   going   to   see   quite   a   lot   of   challenging   of   authority   and   who   runs   the   world   in   the   future.
There   are   some   very,   very   interesting   points   here   Joe.
We   need   to   pick   those   up   with   the   next   update.
Thank   you.