Calls of that are as old as, well, Oswald Spengler at least. However, this time might be different..
A bit too gloomy, if you ask us. Chances exist through selling to the booming rest of the world. This is what is creating a minor new wirtschaftswunder in Germany at the moment. It can be done..
If we’re lucky, we’ll only be 10 per cent poorer
The world’s economic cycle is no longer moving in the West’s favour, argues Jeremy Warner.
Since last week’s shock announcement of a fall in fourth-quarter GDP, the Government has found itself unexpectedly on the back foot in the debate over austerity. The news yesterday that service industries rebounded strongly last month, as the snows melted away, will go some way towards evening things out. But it will be at least a year before we can say for sure whether the Coalition’s bold experiment in fiscal consolidation is undermining or supporting the process of economic renewal.
Would that this faintly tired debate was all we had to worry about. Behind the all-consuming focus on the ups and downs of the monthly growth surveys, there are much more momentous developments afoot, and they don’t bode well. After the credit-fuelled excesses of the past decade, a daunting process of transition awaits the British economy, of which the fiscal consolidation is only a part. If, by the end of it, we’ve managed to limit the decline in relative living standards to 10 per cent, we’ll have done well. It’s much more likely to be closer to 20 per cent. And while the amount that the economy grows in the meantime will obviously affect the size of this squeeze, it can’t eradicate it.
Let’s start with prices. According to yesterday’s UN figures, world food prices rose to another record high in January, up 3.4 per cent on December’s. Fed by explosive growth in demand in the developing world, the costs of fuel, metal and other commodities are following a similar trajectory.
The effect is to create what, for the West, is a quite unfamiliar phenomenon. Inflation is rising, even though the “rich” economies remain profoundly weakened, with abundant spare capacity and surplus labour. For the first time in living memory, America no longer determines the nature of the commodities cycle. The West is out of kilter with the rest of the world, and with little ability to force through wage claims that match inflation, many of its citizens are finding that their living standards are deflating accordingly.
Theoretically, we should be able to catch up quite quickly, once growth and past rates of productivity gain have been properly restored. But in practice, the pressure on real wages and disposable incomes is likely to persist for some years. That’s because the productive potential of the UK and many other advanced economies has been badly damaged by the recession.
Big chunks of capacity may have been permanently lost, with the result that today’s elevated levels of unemployment may soon become structural and entrenched. Such high joblessness will put a powerful brake on future wages even as prices rise.
Much of the rest of the squeeze will come from the Government’s fiscal consolidation. As things stand, public spending is at close to 50 per cent of GDP. To be sustainable, that has to shrink to a little under 40 per cent. Even that might be thought of as too much by some free-market purists – but as long as healthcare funding comes overwhelmingly from the public purse, it will be unrealistic to attempt to trim further.
Some of this adjustment will take place of its own accord, as the economy returns to normal. But the impact of the recession means that quite a bit will have to be surgically removed: we can no longer afford the size of public sector we once had.
The Government’s hope is that private enterprise will fill the gap in employment and demand left by a retreating state. How realistic is this ambition?
Well, we are already seeing a few reasonably encouraging signs. Business investment is growing strongly again, and thanks in part to the weakened pound, manufacturing is experiencing something of a boom. In a potent example of this renaissance, McLaren Automotive is building a £40 million facility in Woking to produce its new high-performance sports car. The project will create 300 jobs, and hundreds more in the supply chain.
Unfortunately, this is but one small success story in a sector tragically shrunken by 30 years of neglect. Nor is Woking the sort of place that is crying out for investment: it’s the North East, and other areas that have become highly dependent on public sector employment, that need the help.
Today, manufacturing accounts for no more than 8 per cent of employment in the UK. Even if its present rate of growth is sustained, it can’t realistically be expected to compensate for the 600,000 jobs slated to be lost in the public sector. Modern high-value-added manufacturers are a far cry from the mass employers of yesteryear: they tend to be quite small-scale, high-capital, low-labour operations. Again, the UK is going to take years of painful adjustment to achieve the desired switch to an economy that balances vibrant services with a thriving manufacturing sector.
Can public policy assist? A little, perhaps, by providing the right tax incentives for regional investment and the requisite degree of supply-side reform. Achieving the hoped-for levels of private investment in the renewal of the country’s infrastructure will also require government policy to be conducive. But in the end, whatever George Osborne comes up with in next month’s Budget by way of a growth strategy can only help oil the cogs. Come what may, the change is being forced upon us. It may be worth the journey, but it’s not going to be a comfortable one.