For those of a certain maturity, the Nineties offered mixed messages. The overthrow of Margaret Thatcher, the ERM debacle and the humiliation by elements in his own party of John Major were all associated with enduring economic misery. The arrival in 1997 of Tony Blair and Gordon Brown, the independence of the Bank of England and Britpop, in contrast, were linked with what turned out to be a rather impressive subsequent economic renaissance.
Could we be on the verge of another such turnaround? If current opinion polls are any guide, the political answer is, perhaps, “yes”. For Blair and Brown, read Starmer and Reeves. And, who knows, perhaps Messrs Sunak and Hunt are laying the foundations for a renewed period of sustained economic advance following the precedent established by Major and Ken Clarke in the mid-Nineties. Inflation targeting and healthy public finances were not so much delivered by Blair and Brown but, rather, handed to them on a plate courtesy of the previous government.
Jeremy Hunt is keen to avoid all talk of “declinism”. For some, he’s channeling the spirit of Franklin Delano Roosevelt, who famously said during the the 1930s Great Depression, “the only thing we have to fear is…fear itself”. For others — more sceptical, perhaps — he’s offering the empty promise of “sunlit uplands”, a phrase used most effectively by Winston Churchill in 1940 but which has been subsequently hijacked by Brexit-supporting politicians.
The case for declinism is not difficult to make. It is, after all, mostly true. As my colleagues at HSBC note in a report asking “Can the British Lion Roar Again?”, per capita incomes in the UK may have grown faster than the other G7 nations in the 15 years running up to the 2008 global financial crisis but, since then, only Italy has done worse. Over this more recent period, sterling has tumbled, exports have failed to respond to this supposed competitive fillip while inflation has been mostly higher than elsewhere.
Still, it is possible to build a case for a more positive near-term outlook. With energy prices now falling, headline inflation will likely drop relative to wage growth, thereby boosting “real” spending power. Households have built up huge amounts of savings during the pandemic and it might just be that, despite plunging consumer confidence and rising mortgage rates, those who can spend, will spend, thus supporting more by way of consumption. It’s a process that’s being felt in the US.
And, with pandemic uncertainties now in global retreat, capital spending might finally start to show signs of life. Throw in a couple of decent trade deals — helped, perhaps, by progress on Northern Ireland — and it’s just possible to imagine a UK freed from the paralysing uncertainties that have done so much damage to economic life in recent years.
Fantasy economics? Probably. While I have no intention of being a cheerleader for declinism, the harsh reality is that the UK has persistently underperformed relative to its own history — and relative to most of its peers — in recent years. Some will blame the global financial crisis. Others will focus on Brexit or the more recent energy shock. Yet whatever the reasons behind our malaise, we have suffered from declinism for a good 15 years or so. And while I’m happy to consider a more optimistic scenario — economists, after all, are hardly the most accurate soothsayers, so it’s always worth considering multiple outcomes — I’m also a realist.
The obvious problem with talking up the economy is that the Bank of England is, via higher interest rates, currently trying to do exactly the opposite. Inflation may fall in the coming months but the Monetary Policy Committee knows some of this decline may be temporary.
The Bank has no control over energy prices — one minute going through the roof, the next through the floor — but it’s aware that wage pressures are too high relative to what’s required for lasting price stability.
William McChesney Martin famously said in 1955, while chairing the US Federal Reserve, that a central bank sometimes finds itself “in the position of the chaperone who has ordered the punch bowl removed just when the party was really warming up”.
Today, the Bank of England is in the process of removing the punch bowl. Sadly, on this occasion, it’s not obvious that the party even started.
Stephen King (@kingeconomist) is HSBC’s Senior Economic Adviser
