Stormy Weather

With our offices across the North West we are acutely aware of the impact the floods in our part of the world have had and continue to have. The debate will rage on whether the flood defences in the area need to be improved or whether the rainfall we have just witnessed is a ‘one off’. However the scientific consensus is not encouraging on the question of whether such extreme weather events are one offs. Part of this debate will, no doubt, move on to ask ‘can the nation afford to invest further in flood defences?’ It is unlikely that there will be any easy answers.


But the stormy weather referred to in the title is not of the meteorological kind, it is of the economic kind. It is a little over 12 months since Mr Cameron referred to the ‘dark storm clouds’ swirling over the worldwide economic landscape. In the last few weeks and months it feels like we might have just started to feel the first splats of rain. The Chinese stock market underwent a series of ‘corrections’ (many would say that the words ‘run’ and ‘panic’ would be more accurate) over the summer period; only being stabilised by massive state intervention in the markets to prop up share prices – but for how long this can be done, who knows.


According to the official economic statistics the Chinese state continues to grow healthily. However we should be wary about using GDP growth as the be-all and end-all of development as we have noted many times before in these blogs. Allied to this is the fact that there are some question marks over how accurate the official statistics truly are…


Many see a better indicator of worldwide economic buoyancy, strength and ‘joie de vivre’ (as our French friends might say) in commodity prices. Here the news is not particularly encouraging. US crude oil is at a little more than $40 a barrel as I write this and there is a view forming that it may stay at this low level for some time. The rationale is that the OPEC nations are flooding the market in order to drive US shale gas (and wannabe UK shale gas) business to the wall. Possibly so. But it may also reflect a global lack of demand as economies remain very fragile. Commodities in general have recently clocked up significant price falls – that is more suggestive of weak economic activity than shenanigans by OPEC.


As I write (8th December) the newswires are headlining that Anglo American Plc shares have ‘tumbled to a fresh record low’ after falling 8% in morning trading. Oversold perhaps – but is this another straw in the wind pointing to a belief that there will be weaker economic performance in the very near future? Unfortunately, when it comes to economics, because it is not a physical science but often much closer to dogma, what we believe about the economic future has a tendency to become self fulfilling.


One interesting bright spot in much that is gloomy, and I mention it in passing only because I think this deserves a full piece in its own right (perhaps in the New Year) is the suggestion that over the last few years whilst GDP has grown worldwide (weakly I know) CO2 emissions have fallen……..have we crossed some kind of Rubicon? Are we now at the stage where rising GDP growth has been uncoupled from rising CO2 pollution? A tantalising, and hopeful, thought…


With falling commodity prices, the spectre of deflation is coming around again. As Keynes pointed out all those years ago, falling prices are not good (although to the consumer in the short term they may feel great – a bit of an early Christmas present even). They are not good because they suppress the animal spirits of entrepreneurs (existing and would be). This in turn depresses their appetite for investing in their businesses or developing new products, services or markets. Profits can stagnate and reduce – and jobs can be lost.


A bit of inflation is all part and parcel of what keeps the economic wheels turning so to speak. But is not of primary or sole importance.


There is a view that one of the key learning points of the economic recession / near collapse we have been through (and continue to feel the effects of) is that for far, far too long national economic policy was reduced down to an overly simplistic heuristic – keep inflation at a low level. The monetarists assured us that as long as that was achieved (and the state did as little as possible in either regulating business and economic activity or carrying it out) then everything would be fine. The last 7 years have shown how mistaken that view was.


Some might say that the UK GDP performance is something we should be proud about. It is true that in comparison to many nations in the west UK GDP growth has been stronger. But what of the quality of this growth? There has been a significant increase in personal borrowings as the consumer has largely fuelled this growth. Perhaps indebted consumers are functioning as rational economic men and women and taking on debt because they have analysed the UK economic landscape and its position in a highly inter-connected world and concluded that on balance the economic future for them personally looks at least as bright as the present. Perhaps….


Also, whilst we have had growth our national debt continues to rise – seemingly inexorably. If you believe that national debt is an existential risk and needs to reduced as quickly as possible (although usually by cutting some government expenditure as opposed to raising more taxable income) then this will upset you. However you might take some comfort from the fact that the IMF disagrees with this view in relation to the vast majority of ‘developed’ economies (Yes! That does include the UK). In fact the IMF more than disagrees with this view – it marshals weighty statistical data to put the case for the completely opposite view – if you want to reduce national debt you don’t do so by cutting expenditure. somewhat counter-intuitively perhaps, you may best cut it by increasing expenditure – expenditure on investment in the UK infrastructure.


This doesn’t just mean more airports near London.


The IMF have been clear; Governments, including the UK, would be best advised to focus upon investing in improving roads, education, rail links, broadband connectivity and the like if they want to generate the tax revenues required to eventually reduce their national debts; and, more than this, if Government wants to generate the greatest positive economic ‘bang for its buck (or rather, pound)’ it should finance these projects not through what some have called ‘peoples’ QE’ but borrowing on the open market. Further, the IMF research suggests that Government spending of this kind crowds in private sector economic activity; it doesn’t crowd it out.


So there is much to occupy the mind on matters economic as we enter the Christmas season; but as with many worries and concerns, we would be well advised to consider the wisdom of ages past (or, should that be sages past?). As Epictetus, the 1st Century Greek Stoic philosopher said (echoing a sentiment of many others before him – and many since) “Men are disturbed not by things, but by the views which they take of them.” And, believe it or not, we do have the power to change those views if we wish. Happy Christmas.


For more information on the topic, please contact Stephen Gregson.