How fragile is the 2014 recovery?

Car production line

So, for the avoidance of doubt, I hate this time of year - largely because of the convention, in the media, in business, in the City, that it is time to take stock and make predictions for the coming year.

Is it that those extra glasses of festive vino are supposed to improve powers of foresight? Or is there some magic in Christmas and Hanukkah that means whatever I was thinking two weeks earlier about what's happening in the world is changed in some mystical way?


Unfortunately it is the expected bonkers. So here goes.

First point.

The economic recovery we've witnessed in almost all the developed and big economies this autumn will continue through most of 2014, and in some cases - including the UK's - may gain momentum.

The "flows" in the global economy - temporarily at least - are not as strong a brake on growth as they were: the pace of tax rises and spending cuts has slowed almost everywhere; consumers are more confident, largely because there haven't been any truly hideous shocks for almost two years; and businesses are a bit more confident.

And, of course, central banks have continued to create free money and cheap credit as if there is no tomorrow - to offset the intractable reluctance of commercial banks and financial institutions to create credit.

Hey presto, this is the jolliest Yule for six years. And if you don't want to spoil the festive mood, stop reading now.

Chinese shopper Western economies need shoppers in China to start spending more

Second point.

The big structural flaws in most economies, and the global economy, are not mended, so - unless this coming year's more benign economic conditions are exploited to accelerate the remediation - the recovery could very easily start to peter out towards the end of 2014.

Or to put it another way, the "stock" problem - excessive debts in Europe, Japan and (to a lesser extent) the US - is still with us. The lack of competitiveness of many western economies, the UK, France, even the US, has not been fixed.

And because of the endemic weakness of the richer economies, China remains dangerously dependent on mind-bogglingly excessive, debt-fuelled investment to generate the rapid growth perceived necessary by its government (and one January treat for you - ha ha - will be a film I've made for BBC2 on whether the Chinese economic miracle is about to expire).

To be clear, in a globalised world, we are all in this together. And the long-term sustainability of growth in both West and East would require two analogous changes: a greater willingness of Chinese people to consume, and an increased desire on our part to save, or cultural revolutions that would be the work of decades.

The way I see all this, as you know (you really do, or you haven't been paying attention), is that there is far too much debt in the world, and far too little equity, because

a) most rich economies have an extraordinary propensity to consume,

b) our banks, till recently, fed this consumption with the frenzied provision of credit,

c) we buy far more from the rest of the world than we sell to it, because our tradeable sector - especially in manufacturing - is too small.

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The business leaders to whom I chat are remarkably bullish right now.”

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On this view, America's much more rapid recovery than Europe's is no mystery: it is because the debts of American households have fallen fairly rapidly since the 2008 global calamity; and because the notorious or celebrated fracking has made America much less dependent on expensive imported energy.

Only France, with its vast nuclear generators, has relatively cheap energy within the EU.

Importantly, European banks and insurers are - generally - weak, not capable of supplying vital credit to households and businesses (this is less of a problem in the UK). And the putative solution, a comprehensive "asset quality review" by the European Central Bank over the coming year, may for a time make banks more risk averse and reluctant to lend, so as to minimise the amount of expensive capital they may be forced to raise to fix their historic imprudence.

Also, and to state the bleedin' obvious, European member states persist in maintaining the conceit that monetary union requires only very limited political and fiscal union.

So, for example, a recently announced plan to tackle the problem of banks that are too big to fail, an agreement on new rules for limiting the impact on taxpayers when they do fail, keeps all the residual burden of rescuing banks on the home country's exchequer. With no explicit sharing of costs and risks by eurozone countries, the finances of the weaker economies - Spain, Italy, inter alia - will remain dangerously stretched.

In those circumstances, of banks' viability in extremis resting on the questionable solvency of their home countries' governments, there is little prospect of banks in the weaker economies being able to borrow from markets cheaply or easily - in that the risks of banks' creditors losing money remain non-trivial.

That in turn means that the weaker banks will remain unhealthily hooked on cheap funding from the European Central Bank, and will continue to find it hard to finance any fledgling economic recovery.

Which I could have condensed by saying "plus ca change..."

Hey presto: Europe is still flatlining, and America is growing at 3% per annum, or maybe a bit more.

All of which creates something of a puzzle: why on earth is Britain growing at an almost identical pace to America, and pulling away from our confrere across the Channel?

Yes, household debts in the UK have fallen relative to income, though not in absolute terms, and they remain high (140% of available income, more than £1.5 trillion).

But, we don't have cheap energy (I didn't need to remind you of that, did I?).

Shopping PPI mis-selling payouts may well be behind the recent rise in consumer spending

Also the gap between what we sell to the rest of the world and what we buy from it has actually been widening. And business investment has increased only very slightly.

Or to put it another way, why are British consumers (is that you, by the way?) saving less and spending again?

I wrote a bit about all this recently.

But, silly me, I forgot quite an important stimulus - which has nothing to do with the Chancellor, or the Bank of England.

You might call it a leaving present from the now defunct Financial Services Authority, because it was the decision in April 2011 of the FSA's then chief executive Hector Sants to force the banks to pay restitution for mis-selling PPI credit insurance.

At the time the FSA estimated this would lead to the banks forking out "just" £4bn.

This was a wild under-estimate. It is now clear the banks will be handing more than £16bn to their customers, which represents a boost to consumers' balances of around 1% of GDP.

Since around three quarters of this PPI cash has been handed out over the past 18 months, this is probably the single biggest contributor to the revival of consumer spending.

The banks' sins of the past transformed into a current virtue, thanks to the intermediation of the regulator.

Wunderbar, surely.

It's coming to an end of course (although the spam texts and cold calls from the dratted claims firms would make you think otherwise).

Which is why it really matters that businesses, with their tails up a bit, become less risk averse and start investing.

As it happens, the business leaders to whom I chat are remarkably bullish right now. And although this is hideously unscientific and "intuitive", my sense is that there are some legs to this recovery, for all the drag of a lamentable trade performance.

So what's the biggest challenge or risk for 2014?

It is the probable phasing out of money and cheap-debt creation by the US and UK central banks (there is no chance of that happening in the eurozone).

Will the economies in the US and UK have achieved adequate lift-off velocity to withstand the choking off of the fuel of exceptional monetary stimulus?

Gawd only knows, because this is genuinely uncharted territory. If you pressed me, I would say I doubt it, but I could be wrong (as if you doubted that).

Robert Peston Article written by Robert Peston Robert Peston Economics editor

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  • rate this

    Comment number 52.

    Don't disagree with your strategic emphasis - would love to see the Londoncentric Spiv community take that very same long term view but it seems the only issues they want to view as long term are Vickers implementation of capping of unlimited bonus and regulation
    Ditto ref govt attitude towards collection of due taxes in midst of the deepest of recessions - morally repugnant as Dave would say

  • rate this

    Comment number 51.

    How fragile is the 2014 recovery?

    We have bankrupt banks - ZOMBIES the fake living dead. With these unburied corpses rotting on every high street and creating an appalling foetid stench at the core of business need you ask the question?

    The FIRST requirement for a recovery is a return to sound money. That is money that is positively priced by all economic actors ( QE recovered and rates at 5%).

  • rate this

    Comment number 50.

    How fragile is the 2014 recovery?
    I guess that rather depends on the figures.
    "According to the former document, compiled on the basis of well-understood accounting standards, the UK’s in-year deficit for 2011-12 was £185bn. The national accounts used by the chancellor put the figure at £90bn."
    Go figure.

  • rate this

    Comment number 49.

    The person on the street does not feel things getting better. Why do politicians and finance people not realise that it took years to get in this mess and will take years to get out of. I am sick of all the quick fix thatpoliticians talk and the ones to get my vote would be the realistic one.

  • rate this

    Comment number 48.

    There is no recovery until,

    food banks become obsolete,
    Banks pay reasonable interest to savers,
    elderly can afford to both eat & heat,
    sterling achieves real monetary value,
    billions to EU are negotiated downwards,
    payday lenders become obsolete,
    zero hours contracts are outlawed,
    banking fraud is prosecuted,
    and finally, we find a Chancellor who appreciates the value of industry.

  • rate this

    Comment number 47.

    I'm more optimistic about the UK that I have been for years.
    Why am I relatively optimismistic?
    What needs to be done to strengthen the British economy is now widely appreciated and understood: keep a lid on public debt; expand manufacturing; save and invest; attract FDI; improve skills.
    When a problem is recognised you're more than half way to solving it..

  • rate this

    Comment number 46.

    Oh Pesto wrong so often, so like Ed Balls. When your predictions wrong move to another area to criticise. I have employed an extra 5 staff this year and am looking forward to 2014.
    At least the opposition have to downplay the recovery, the clue is in their name, whats your excuse?

  • rate this

    Comment number 45.

    #the long-term sustainability of growth in both West and East would require two analogous changes: a greater willingness of Chinese people to consume, and an increased desire on our part to save#

    No chance, the gov as made it clear savers are the enemy. To be victimised at every turn. Want savers? Get rates up. No excuses. With it annuity returns too. Stop pandering to the spendthrift borrowers.

  • rate this

    Comment number 44.

    National economic growth, as household budgets shrink - a real mystery.

  • rate this

    Comment number 43.

    Recovery only starts when the numerous schemes devised to save our Banks are wound up.

    How much of the GDP figures we see rely on this churn created with tax payers money ?

    Chancellor still wanting 12Bn more in welfare cuts its a massive sum yet i doubt it is one months help for the banks when they are all added up.
    We need banking reform and its nowhere in sight,until then there is no recovery.

  • rate this

    Comment number 42.

  • rate this

    Comment number 41.

    What recovery?

    I'm still waiting for the double and triple dip recessions that the two Ed's promised us would happen.

  • rate this

    Comment number 40.

    It this the recovery funded by more debt or the one based on a mini house price bubble?

    Any chance you could write an article about Iceland jailing individual bankers and possibly suggesting we do likewise? The BBC are as bad as Gideon for defending these parasites.

  • rate this

    Comment number 39.

    The economy is almost entirely driven by consumer spending, productivity is amongst the lowest in the OECD, the trade deficit is too big and the British education system is falling behind internationally. All these factors and more point to the fact that a sensible and fundamental economic recovery is near impossible. We are resorting to another credit/housing bubble to magic growth.

  • rate this

    Comment number 38.

    There is no recovery, except that made by statisticians, economists & politicians - all of which understate inflation/unemployment while overstating GDP growth. As 2013 winds down, getting printed money past the banks, into economy = inflation explosion = then hyperinflation. Disruptions in food & energy will become widespread, as will social unrest.
    Happy New year!!

  • rate this

    Comment number 37.

    Look forward to your film Robert. So stop buying Chinese and force them to buy their own products - but they have to stop tracking the $ -simples. What I do know is that the interest rate for savings will be an election issue? Not helped by the PM constantly affirming what a good job he's doing keeping rates low! The longer this issue is avoided the worse the outcome will be.

  • rate this

    Comment number 36.

    I see some positive signs in the economy from manufacturing, but we are maybe 10% down what is needed to "rebalance the economy"
    As long as fat money can be made in banking then no one will invest building computers, planes, ships etc here.
    This is the reason banking needs to be beaten down to a utility status.

  • rate this

    Comment number 35.

    Fed’s insane behavior can only be sane IF assumption is Fed’s intent is not to save economy but to save banks. It's likely big banks know Fed’s plan advance. With inside information, they know when to short stock, bond, & bullion markets. Banks make billions from the inside trading. Yet, there are very few investigations, very few trials, next to no imprisonments.

  • rate this

    Comment number 34.

    31 "Some people hate the thougth of good news " and "'Austerity' has not yet boosted exports while borrowing has actually increased. 2016 looks bleak!"

    Having your cake and eating it, I think this is called

    For six years people on this board have been screaming blue murder because we're worried about our children's future. I get no pleasure out of this. The only response is the kicking of a can

  • rate this

    Comment number 33.

    surely growth is immaterial if that growth forces larger debts.... in the end when debts cannot be repaid..... crash


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