Economic Update: May 2009 Professor Joe Nellis SM Welcome to the latest economic update with Professor Joe Nellis. It is very confusing times at the moment: on the one had we have Alistair Darling saying that the UK is going to start to turn up in the autumn; on the other hand Standard and Poor’s have downgraded the UK in terms of the future outlook. On top of that, General Motors looks like it is heading for the bankruptcy court and British Airways made major loses and it’s likely to continue. Now, Joe, what is going on? JN Well we are in a recession Steve, that is the obvious answer. But the picture you describe, of course, is a very mixed picture and it applies to different parts of the world at different times. The UK is still, and will be for some time, in a deep recession. That is the fact of the matter. Internally trade has fallen, airline travel has fallen, car sales have fallen. So all of these are consistent actually with what you have said, but different countries are experiencing different effects at different times. SM The general public tends to think “Why can’t these economists get their act together?” We hear all these completely contradictory things. Now can you throw any light on that? JN Absolutely Steve. Let me put it this way; if I were to ask a dozen people to drive a dozen cars they would all drive them differently. Some of us crash, some of us speed, some of us swerve. So it is with the economy. The economy is not a machine. It is made up of decisions by individuals, by companies, government. And we are human beings, we are not robots. And it is actually very difficult at times like this to predict behaviour when behaviour is so volatile. We are going through times that we haven’t seen for several generations. So in a sense we don’t have data that gives us some easy forecasting figures. But let’s not lose sight of this – the reality is that people, the economy, which made up of people, is volatile. And in that situation we should expect to see behaviours that perhaps are not as we would expect. But having said all of that, most economists, the vast majority of economists are agreed on the general direction – of course that is downwards – and the scale of the recession. Where we disagree perhaps, to some extent, is how we solve it. But again, that is like going to four or five different doctors; they may have different views about which medicine is most appropriate. So this is the reality, we are not dealing with a machine. SM Now let’s focus in on the UK first of all. What are the biggest challenges the UK faces right now? Professor Joe Nellis
JN Well obviously first of all the recession – as we have talked about on many occasions. It has just been confirmed in the last few days that the first quarter officially saw a GDP fall by 1.9%. That is now confirmed. And of course, we have got several more quarters to go before we see an upturn. I suspect that we will see two or three negative figures for GDP growth in the coming year. On top of all of that, the biggest challenge – which is more of a medium to longer term challenge, which is why Standard and Poor was mentioned earlier – is government borrowing and the national debt. Government borrowing in this financial year, which has just begun in April, will according to the Government’s own figures be around 12.4% of GDP. And that is £175bn this year, based on the Government’s own figures. In a normal year, 3% borrowing of GDP would be acceptable. So we are way outside the norms. But I want you to visualise that if 12.4% continues at say 12% next year, then at 11% the following year – it’s going to decline slowly, but it’s going to accumulate. It’s going to add to the national debt and this is the big issue that Standard and Poor has mentioned in the last couple of days. SM Let’s turn to the global situation. Can you see changes there? What is the outlook? JN A very mixed picture. There are signs in America of some pick up in confidence, but at the same time housing starts have fallen. So their picture is very mixed. The new President of course, Obama, is optimistic, but cautious at the same time. The more positive outlook is actually in Euroland, and particularly in Germany. Germany has seen a significant increase in business confidence and some activity in the last month or some. But the really negative picture across the whole world is Japan. I mentioned that UK GDP fell by 1.9% in the first quarter; in Japan it fell by 4%. That is a record. On top of that consumer spending is falling, unemployment is rising, wages are falling, house prices are falling. And on top of that, Japan relies heavily on world trade and world trade is falling. Japan is in the grip of a long term serious decline. SM That is worrying news. What would you see then in the light of the data that is coming out now that you would like to say, well we are going to have to revise some forecasts here – things that we have talked about previously? JN I wouldn’t revise anything significantly. The only positive sign in the last day in fact has been the fact that Nationwide Building Society has reported a slight increase in house prices in the month of May – a 1% rise, which is the second month out of the last three that there has been a rise. I don’t want to exaggerate that. A rise in house prices is not necessarily a sign of recovery in the housing market. It may be a sign of a little bit Page 2
Professor Joe Nellis
more activity, or that prices have bottomed out. What I am really looking for is an increase in house building, housing starts. There is no start of that yet and of course this is Spring time which is usually the time when we do see a pick up. So housing market – some positive signs there, but a long way to go yet. SM Joe, thank you. JN Thank you. Page 3