Amidst all the doom and gloom, could the received wisdom of a double dip recession be wrong? Surely not if one considers the various inputs into economic models (tax rises, spending cuts etc.), a double dip seems to be a slam dunk. After all it’s being forecasted by most economists and the government is due to announce the latest GDP stats this Wednesday. But, there are plenty of reasons why these predictions may be right in the short term, but wrong by the end of 2012.
Why are economists so often wrong? First, they rely on flawed economic models which are rarely accurate. These models use variable inputs that are dynamic and unpredictable. Any number of unpredictable variables applied in a formula, doth not an absolute make. Surely the biggest influence on the economy is the greatest variable of them all: human behaviour! And that can’t be modelled. Secondly, because the models are flawed, economists and politicians default to looking at data that relates to the last month or quarter and use that to predict the next one. That’s history chaps! A useful guide but not reliable. Thirdly, they rarely observe what’s happening in the real world as they lounge in their ivory technocrat towers. In the real world, i.e. in companies and households, on high streets and on line, things are often very different. For every loser that makes a headline, there’s a winner next door. I hear nothing but bad news…but funnily enough I see lots of good news.
I argue that the best kind of economic analysis is often based on an understanding of the relationships between the variables within the model (the economic levers) rather than trying to attach a precise formula to them. Combine that with a bit of feel for what’s happening on the ground, what one might call ‘anecdotal evidence’, and I venture to suggest one has the perfect analysis tool in an imperfect world. And my anecdotal feelers suggest things aren’t half as bad as we are led to believe in the media.
So applying my logic, what does that suggest for the British economy in 2012? Well a rather better performance than the doomsayers would have us believe for the following reasons (all of which are deliberately selectively positive!):
1. Record low interest rates are a hugely expansionary economic weapon - they’ve enhanced corporate profitability significantly and they have enabled the private sector to pay down debt rapidly. Very many less companies have gone bust than anyone anticipated, with insolvencies actually falling throughout most of 2011. At the same time those in work and with a mortgage are better off than they have been for a very long time. Hey, I once paid a rate of 15.2% on my first mortgage (in 1988); now I’m paying rather less.
2. Corporate self help has repaired company profitability and balance sheets - the corporate sector is in its best shape for a number of years. This is allowing many more companies than in the last couple of years to hand out pay rises and bonuses, and to increase their dividends. Even in the apparently moribund sectors of house building and real estate, the smart self helpers are in good shape and are increasing profits even in a flat market. That money will find its way back into the economy.
3. Britain has always had a variable speed economy - as has been the case with the last few recessions and booms. The South performs better than the North. London is a unique engine of growth as well as a safe haven and store of wealth. Property, construction and retail are hugely cyclical. Technology, pharma and the creative industries continue to grow. Tired high street formats go bust and grab all the headlines, whilst Mulberry and Jimmy Choo go from strength to strength and become global brands. Plus ca change. So the headlines often mask the good bits and exaggerate the bad bits.
4. Recoveries tend to start before anyone realises - because economic statistics are backward looking. Just because it doesn’t fell like it doesn’t mean it might not be happening. Every recession finishes before we realise it and every recovery starts before we know it.
5. Economies are dynamic and creative – we adjust to the circumstances we live in. We adapt and we get on with it. There’s only so long you can postpone your investment decision. Only so long an ambitious company or individual can wait for better times, before taking the initiative and just doing it.
6. US economy to the rescue - Britain is uniquely positioned to take advantage of a US recovery given our strong trading links and exposure to US investment earnings. And it looks like the US is on the move again.
7. Lower prices are a game changer - more rapidly falling inflation than expected will ensure household disposable income recovers quickly. And most importantly enable interest rates to stay lower for longer. That combination is a compelling recipe for recovery.
8. Europe is a red herring - either it gets fixed or it falls apart and soon. The end game is nearing. A break up of the Euro would cause significant short term disruption and dislocation but that’s been exaggerated. Longer term recovery would be accelerated as the weaker economies take back management of their own monetary policy and devalue their currencies whilst using QE to kick start growth.
Wishful thinking. Cnut like swimming against the tide. Glass half empty. All of the above. Let’s hope I’m not wrong.