The problem with recessions is that you don’t know you’re in one until it is too late. That is because nobody actually knows what the economy is doing right now. We have to wait until government and corporate statisticians compile and analyse the data – a process that can take three months or more. So the economic data that we have today tells us more about how the UK economy was doing in January than it does about April.
With the election in full flow, the media has been quick to latch onto any positive news that they can find. Consumers are still confident (but not as much as before the Brexit result) and retail sales are soaring. Unemployment is at its lowest in decades. Manufacturing exports are up slightly too. But each of these apparently positive indicators has to be qualified.
Consumer confidence is backward looking. It tells us more about what people were doing in the January sales rather than what they may be doing next month. Retail sales are up in a single British Retail Consortium survey that fails to take account of Easter (which fell in March 2016 but April this year). As Chris Giles, Economics Editor at the Financial Times points out:
“Unlike official retail sales figures, which have yet to be published for April, the BRC figures measure the value of retail sales in shops and online, but do not adjust for the changing date of Easter. They provide an early yet volatile impression of the health of the British high street…
“Data from Barclaycard, also published on Tuesday, provided further evidence that the sharp rise in spending was caused by the late Easter compared with last year, rather than a more positive change in underlying spending patterns.”
Headline unemployment figures are misleading too since they mask a huge rise in low-paid part-time, zero-hours and self-employed “gig economy” positions. As BBC Economics Editor Kamal Ahmed reports:
“A recent report by the Joseph Rowntree Foundation found that the number of people defined as suffering “in-work poverty” had risen by 1.1 million since 2010, to 3.8 million.
“… the report said that high housing costs, low wage growth and cuts to benefits meant that more people were officially classed as below the poverty line (an income of 60% of median earnings) despite being in work.”
The slight increase in manufacturing exports is the result of the same fall in the value of the Pound that has brought a sharp increase in inflation to domestic markets. British goods are now cheaper, generating additional demand from abroad. But the downside is that our high dependency on imports more than cancels out the benefits from exports and adds to the UK’s current account deficit.
In many ways, then, the headline economic indicators that the media and politicians tend to latch onto are little more than the froth on top of the beer. What really matters to GDP growth is a corresponding growth of the money supply. Put simply, when the supply of money grows, so does the economy. But if the money supply shrinks, the economy plunges into recession. So how does the money supply grow? One way would be for savers (companies and households) to start spending. Another is for government to print new money into circulation. But these account for just a tiny fraction of the new currency created in the UK (and world) economy. The vast amount (around 97 percent) of the currency in circulation is created in the form of debt. That is, every time a consumer or company takes out a loan, new money is created.
This being the case, one of the key economic indicators that we need to follow is borrowing. And of all of the things we, collectively, borrow against, two stand out – houses and cars. These two items are by far the most expensive items most of us will ever buy. The average UK house price today is around £217,500. The average family hatchback in 2016 was £17,000. So if an average household borrows to buy a house and a car, close to a quarter of a million pounds of new currency enters the economy.
Of course, we do not always borrow to buy cars and houses. Some people buy cars for cash, and if you already have a house, then you only need borrow the difference on a new one. Nevertheless, mortgages and car loans account for a large amount of the currency in circulation. For this reason, any fall in sales in these two sectors of the economy could prove disastrous for a wider economy still struggling with the after effects of 2008, and yet to come to terms with Brexit.
So what is happening to vehicle and house sales? According to Joe Watts at the Independent:
“On Thursday the Society of Motor Manufacturers announced new car sales had plunged 19.8 per cent year-on-year in April. There were some extenuating factors, but the size of the drop clearly pointed to consumers’ purchasing power falling and a more challenging time ahead for the industry.
“The Bank of England also reported that mortgage approvals for house purchases dropped to a six-month low in March, the second successive drop and evidence the housing market is also being pinched by the squeeze on consumers.”
According to professor Steve Keen (one of only a handful of economists to predict the 2008 crash) that crisis was the result of countries overloaded with private debt experiencing a sudden fall in the rate of borrowing. It is worth noting that UK private debt as a proportion of to GDP is now back to where it was on the eve of the 2008 crash. With that in mind, any fall in borrowing against the two big ticket items – cars and property – could spell disaster for the UK.
As Watts notes, Tory insiders have pointed to looming economic problems – which can only be exacerbated by Brexit – as a key reason for Theresa May u-turning on her promise not to call an early election. Tory strategists are determined not to repeat Gordon Brown’s error of failing to call a winnable election before the crisis hits. Their hope will be that they can ride out the coming economic downturn and restore confidence prior to a 2022 election.
This may be optimistic if the downturn proves to be global. None of the fundamental problems that led to the 2008 crash have been resolved. Indeed, banks and governments are sitting on far more (potentially bad) debt today than they were in 2007. This time around, we may well discover that the global financial system is just too big to save. If so, whatever the outcome of the Brexit negotiations, it is doubtful that the UK can survive as a top tier economy.