Who will get credit for Britain’s economic turnaround?

By Anatole Kaletsky
July 5, 2013

Mark Carney, the former head of the Bank of Canada who has just taken over as governor of the Bank of England, presided Thursday over his first monthly meeting of Britain’s Monetary Policy Committee (MPC). The meeting produced no change in monetary policy, yet Carney is already being hailed as Britain’s economic savior. The BBC even paid him the greatest compliment that any middle-aged white male could wish for, when it compared his appearance and hairstyle to George Clooney’s. Carney may continue basking in this adulation because he is lucky enough to be in the right place at the right time.

He has arrived at the BoE at the precise moment when the economic figures have started to suggest that the British economy is pulling out of its longest and deepest recession on record. One of the main reasons for this turnaround has been a sudden pickup in housing prices and mortgage lending, the traditional driving forces of the British economy. This improvement, in turn, has reflected a bold new government-backed borrowing program, whereby the British Treasury is guaranteeing up to £600,000 of new mortgage debt for anyone who can put up 5 percent of equity into buying a home. While this audacious policy attracted surprisingly little attention in the media when George Osborne announced it in his March budget, British homeowners and bankers were quick to catch on. As a result, house prices are rising rapidly across Britain, mortgage lending has rebounded to its highest level since the Lehman crisis and homebuilders’ shares have almost doubled. And all this is before the government incentives are expanded from newly-built houses to secondhand properties and remortgages in January 2014. For the moment, house prices are being bid up by cash-rich buyers who are front-running the government subsidies, in the confident expectation that a full-scale property boom will begin in 2014.

Given the powerful response to the government’s mortgage subsidies, the additional quantitative easing that was widely expected from Mark Carney’s “monetary activism” may no longer be required. It may be enough for the BoE to provide commercial banks with liquidity to finance the government’s planned credit expansion and to keep short-term rates near zero. Instead of trying to persuade the hawks on the MPC who repeatedly thwarted his predecessor Mervyn King’s requests for more QE, Carney may succeed in reviving the British economy simply by making a few speeches — the “forward guidance” he used in Canada to convince investors that interest rates would stay near zero for several years ahead.

But what will the impact be on the British economy if Carney and Osborne manage to generate a property and mortgage boom? Refloating the economy on a wave of property appreciation and mortgage borrowing would return Britain to the debt-driven, consumer-led growth of the pre-Lehman period. It would mean abandoning the “structural rebalancing” from consumption and services to exports and manufacturing that Mervyn King believed was essential to Britain’s economic rehabilitation. But King’s views are no longer relevant — and his record of economic management suggests that a degree of skepticism about his analysis may be in order.

Britain’s economic history suggests that the conventional wisdom about the benefits of rebalancing from services to manufacturing may simply be wrong. In the five years of attempted rebalancing since the financial crisis started in 2008, Britain’s economic performance has been abysmal. GDP has lagged behind every G7 country apart from Italy. GDP per capita, the broadest measure of living standards and productivity, has done even worse, falling by 6.7 percent from its 2008 peak, with no evidence of recovery since 2010. The industrial production record has been just as bad. Despite the official efforts to promote manufacturing and the big devaluation of the pound after 2008, industrial production has been even weaker in Britain than in France — down by 13.6 percent since its peak in May 2007, compared with 13.5 percent in France.

But taking a longer view, to the period before the fashion for rebalancing, a very different picture emerges of Britain’s economic performance. While Britain has been one of the weakest economies in the world since the crisis, during the 20-year period from 1993 to 2012 Britain has actually been the strongest economy in the G7, even allowing for the dismal performance of the past five years. Britain’s GDP per capita increased by 50.1 percent in the 20 years since 1993, well ahead of the 40 percent increase in the next best country (Canada) and far better than the gains of 32 percent in the U.S., 29 percent in Germany or 22 percent in France.

It seems, therefore, that simply to forget about rebalancing and to restore the service and consumer-led economy of the pre-Lehman period might not be such a bad idea. The economic structure of the 1993-2007 period, with its reliance on financial and business services, on media and entertainment, on research and elite education, and even on property speculation — may be better suited to Britain’s comparative advantages than King’s pipe dream of a German-style economy focused on metal-bashing and exports.

It may be, in other words, that Britain was actually moving in the right direction during the Major-Blair-Brown years and only took a wrong turn after Lehman. History may even conclude that Gordon Brown’s ideas about the right structure for the British economy were better than Mervyn King’s. But, of course, nobody will see things that way. If a boom in property and mortgage debt succeeds in lifting the British economy, as appears quite likely, the credit will go to the Conservative-led government, which will probably win the 2015 election, and to the new regime at the Bank of England. George Osborne will be hailed as a political genius and Mark Carney as Britain’s economic savior. Such are the rewards for being in the right place at the right time.

PHOTO: Mark Carney, the governor of the Bank of England, attends a monetary policy committee (MPC) briefing on his first day at the central bank’s headquarters in London July 1, 2013. REUTERS/Jason Alden/pool 

4 comments

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Nice follow up to “When illogical policy seems to work” article on 13th June. But what about how this ends ? Sure house prices in real terms are more reasonably priced but this boom is still starting from a relatively high level. On an affordability basis due to record low mortgage rates I can see house prices rising 30+% but what happens when rates start to rise ?! The crash from the last boom was relatively short lived due to interest rates going to near zero. Next time if rates have to rise aggressively to tackle inflation things are going to be painful and maybe nobody will be able to ride to the rescue!

Posted by heyrevolver | Report as abusive

While historical evidence would seem irrefutable in favour of economic growth based on service and consumer led option, given significant dependence on the financial sector driving this growth approach it may not be possible to achieve as much success in the future as was possible post the Big Bang. The financial meltdown on the back of the Lehman crash has left Banks in general and British banks in particular in a much weaker position to generate earnings, especially from the arguably more risky investment banking activities. With a more stringent regulatory environment in the offing it may leave an indefinite curb in this regard. The big bonuses may no longer be the order of the day with consequent impact on tax revenues for the Treasury and on consumption and services sectors.

Beyond that, Britain must create wealth from productive activities and to that end the rebalancing process must be persevered with even while service and consumption sectors enable recovery in the short run. Otherwise dependence on asset bubbles and debt will remain the cornerstone of the British economic growth with all the attendant risks that have got us in the current mess!

Posted by vkbaxi | Report as abusive

Forget any economic recovery as it simply will not happen with the present economic policy thinking.

Over the last forty-five years I have witnesses at first hand the relative decline of the living standards of the vast majority of the people living in Britain. This has been due to a combination of things but primarily it has been the bad decision-making of successive governments and the lack of a coherent economic strategy based on the ‘inclusive’ exploitation of innovation and creativity. What has been the case is that the ‘elitist’ system has run riot excluding totally the world-leading thinking and inventiveness of the British people, something that Japan and Germany have determined is the best in the world by far and commands 53% of the why the modern world is as it is today. For this has and is totally dormant in the UK presently and where this prerequisite for future economic dynamism has not been ‘tapped’ into to date by government. Indeed this pre-eminent of economic catalysts has not been allowed into the system since Britain ruled the world in trade and unleashed the ‘Industrial Revolution’ some 200 years ago. What successive governments have forgot is that it was our great inventors and engineers who at the fundamental level made our nation into the most powerful economic nation in the world and where these individuals in the main were independent thinkers drawn from what we call the common class (or woman), not the establishment classes. Indeed this total lack of involvement through inept government policy has meant that we have not created any new global technological industries ourselves to provide jobs for our people and the constant revitalisation of the nation’s wealth. Get this world-changing thinking back into our mainstream economic policy thinking and then we would see the re-emergence of a new Great Britain. For presently we have the university-corporate research and business interactive model that has failed the nation miserably and where the reason for this is that it should be the inventor-engineer driven university-business model. Therefore not until we have this in place and the vital ‘missing-link’ included again will the nation rise from the ashes to economic and debt salvation – this debt currently projected by PwC to be £10.2 trillion by 2015 and where the total value of the UK according to the ONS is only £6.8 trillion; a shortfall of nearly £4 trillion. That is how bad things really are and why we have to change our thinking to a fully-inclusive one that allows all the creative thinking of the British people to be incorporated and not a mere small percentage of elites who have consistently got it so horribly wrong. HS2 is just one example of this where the thinking is all wrong in Britain today at the top and where there will be no significant jobs created after it has been completed for the taxpayer’s investment of some £43 billion and counting.

Dr David Hill
Chief Executive
World Innovation Foundation

Posted by bettysenior | Report as abusive

Economic turnaround? Hey, that is riotously funny.
So long as one pig brained government after another pays interest on toilet paper,(QE) there is not going to be any turnaround.One cannot trust any govt. stats.
I well remember Harold Weasel’s Dynamic Technological Stagnation with the cancellation of Blue Streak and TSR2, to name but a few.All they excel at is stealing.Bastards.

Posted by gildedtumbril | Report as abusive