British politics has perked up – to say the least. It’s just over a fortnight since the dramatic local and European elections in which Ukip surged. Now we’ve seen a riveting Newark contest, featuring a Tory fight back.
With all this, plus open warfare in the cabinet and the Queen’s Speech, complete with fainting pageboy, the Westminster village has been on overdrive. Domestic politics has dominated the airwaves over the last week – and that’s great. Clearly an econo-nerd, I’m a political junkie too.
It strikes me, though, that almost all the political analysis we hear takes it as given that the UK economy is fast-improving and, as the May 2015 general election approaches, will get better still. That may, indeed, happen and I certainly hope it does. Yet, away from high-octane TV psephology, economic news has emerged since last weekend, particularly from abroad, which could ultimately mean all political bets are off.
I distinctly remember the day I decided the UK should never join the European single currency. I couldn’t tell you the precise date, and am not absolutely sure what year it was – probably 1990. But I vividly remember sitting in my student digs – jostick burning, posters on the wall – surrounded by books and articles. It was one of those moments when, after intensive reading, the penny almost audibly dropped.
As an economics undergraduate, I had to study a lot of complex mathematical modeling. Rebelling against the arid pointlessness of pretending economics is a science, I immersed myself in economic history too. It was while learning about the failed monetary unions of the past – particularly those of the mid- and late-nineteenth century, in Latin America, Scandinavia and the nascent United States – that I instinctively realized the euro, still then not a reality but almost certainly coming, was in for a bumpy ride.
“Storm clouds gather over emerging markets”, boomed The Financial Times’ influential leader column in mid-January. This inclement headline was whipped up after the paper choose to focus on a “disorderly adjustment scenario” outlined across just a few paragraphs of the latest edition of The World Bank’s Global Economic Prospects. The 150-page tome is, in large part, about the Western world, not emerging markets. The question at its heart is whether the “advanced” economies, having remained sluggish since the 2008 sub-prime collapse, are now staging a proper return to growth.
“For the first time in five years,” reads the opening lines of the World Bank’s report, “there are indications a self-sustaining recovery has begun among high-income countries – suggesting they may now join developing nations as a second engine of global economic growth”.
Economies across Africa and Asia, in other words, along with the emerging markets of Latin America and BNE’s home region of Eastern Europe and Eurasia, are performing quite well. These nascent capitalist societies are the “engine of global economic growth”, says the World Bank.
Economists aren’t very popular. Dismal scientists, after all, are the kind of experts who don’t know what they’re talking about but make you feel as if that’s your fault. Such bamboozling is often deliberate, especially when it comes to forecasting. Projections and prejudices take on the air of unchallengeable truths when expressed in faux-scientific language and garnished with mathematical hocus-pocus.
As an economist myself, I’d say that one of the few positives from this ghastly sub-prime crisis is that the profession is becoming more humble. Since the credit crunch, the use by economists of ever more complex models, and the increasingly inane assumptions that go with them, has partly reversed. Good.
Back in the spring, Ben Bernanke told the world that “tapering” would start “later this year”. The Federal Reserve Chairman was indicating, in other words, that America’s central bank would start to wind-down its $85-a-month money-printing habit by the end of 2013.
Such an outcome now looks increasingly unlikely. My view, in fact, is that the Fed, could soon unleash more, not less, quantitative easing – ramping up the policy rather than tapering. Such an outcome, were it to happen, would be incredibly risky. Speeding up monetary stimulation, rather than slowing it down, could spook financial markets – and even cause a panic. Yet in recent weeks, I’ve heard several well-placed economists and policy-makers, especially in the US, start to contemplate such action.
On 18th September, the Federal Reserve announced that it wasn’t about to start slowing its $85bn-a-month money printing habit? Why did the US central bank decide not to “taper”? The official line is that the Fed was worried about the impact of higher mortgage rates on the still-shaky US housing market. Fed Chairman Ben Bernanke also outlined his concern that the American labour market is weaker than it seems.
Another possible reason for the taper delay, one not cited by Bernanke, is that we’re in the “debt-ceiling season”, with Democrats and Republicans indulging in their seemingly annual game of posturing and buck-passing. Washington is playing chicken, once again, over the prospect of a US sovereign default.
“As a practitioner of markets, I love this stuff,” said Stanley Druckenmiller. “This stuff is fantastic for every rich person. It’s the biggest distribution of wealth from the poor and the middle classes to the rich ever.”
Druckenmiller is among Wall Street’s most fabled investors. He started Duquesne Capital in the early 1980s then teamed up with George Soros, running the legendary Quantum Fund. Together they made billions by “breaking the Bank of England”, shorting the pound in massive volumes and forcing sterling out of the Exchange Rate Mechanism. That was in 1992.
The quotation above is more recent. Druckenmiller said these words on CNBC television last Thursday and the “stuff” was quantitative easing. While extremely critical of America’s $85bn-a-month money-printing habit, Druckenmiller is at least decent enough to acknowledge that, as a wealthy chap with a bucket-load of equities, the Federal Reserve’s asset-buying programme has made him even richer.
Last Thursday, in its latest bid to kick-start the US economy, the Federal Reserve went “open-ended”. America’s central bank is to launch a third round of “quantitative easing”, Fed Chairman Ben Bernanke announced, while extending the length of its pledge to keep interest rates at rock-bottom. On cue, global equities surged, as confidence grew that the world’s leading central banks have “finally taken decisive action” to buttress both the US and European economies.
Bernanke’s move, of course, followed news in early September that the European Central Bank is to engage in “unlimited” buying of the sovereign bonds of “peripheral” eurozone members. This encouraged the belief that monetary union is less likely to crumble, which cheered-up global equity markets just before last weekend. Many traders are celebrating this weekend too, following Bernanke’s words on Thursday, which caused the S&P500 to extend a rise that has now pushed the index to its highest level since 2007. European shares also reached highs not seen for over a year.
The outlook for the American economy is improving. That was the message from the Federal Reserve last Wednesday, as the US central bank issued new forecasts showing faster GDP growth and lower unemployment. But no, America’s economic prospects are actually getting worse. That was the clear implication of disappointing official growth numbers published less than 48 hours later. The US economy expanded 2.2pc during the first quarter, we learnt, well-below market expectations and sharply down from the 3pc growth rate notched-up during the final three months of 2011.
The economic news flowed thick and fast last week. The UK has just slipped back into recession, albeit on preliminary first quarter data. The eurozone too, continued to vex financial markets, with Sarkozy now in serious danger of losing the French Presidency and the “hard-as-nails” Dutch government quitting after rows over tighter spending plans.
During the first few months of 2010 and 2011, America showed encouraging signs of robust economic growth. In both years, though, by the spring or early summer, hopes of the world’s biggest economy mounting a meaningful and sustainable recovery were snuffed-out.
As a result, the US managed only a paltry 1.7pc real terms GDP expansion in 2011. In recent months, once again, there have been strong indications this could be the year we finally see a proper lift-off in the States. America has put in yet another strong first quarter, with the economy, if anything, performing even better than during the first three months of 2010 and 2011.