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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  • Comment number 372.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • rate this

    Comment number 371.

    337. alan
    I expect the balance of trade deficit to fall significantly over the next 5 years.


    Surely we need to do more than reduce the deficit, we need a plus balance. Am right in saying that post war years in which we have traded with a positive balance have been as rare as rocking horse ****

  • rate this

    Comment number 370.

    Turner was taking his cue from Brown/Balls who were being lobbied by Fred the Shred and other bankers going behind his back.
    The political message was "light-touch regulation".
    It would have been the same if the Conservatives had been in power.
    But probably not the case if the Lib/Dems had held the balance of power.
    These things don't happen is a political vacuum.

  • rate this

    Comment number 369.

    plotinus @362
    at the heart"

    But stunted, distorted, trammelled, not simply 'tapped into more'

    Partaking of the nature of God, in reason & care, beyond upbringing our need is not so much of new endowment or exhortation, rather of liberation: OT "I will set my people free"; NT "sell all & follow me"

    From Pharaoh & from Mammon, for freedom we do have to choose: equality or inequality

  • rate this

    Comment number 368.

    @364 Tim Browning "Why would it change in the near term or change our current growth?"

    Well, it is official policy... but in the near term, we need to look at the public sector net cash requirement, which has been negative for nine of the last ten months (March being the exception). This amounts to a reducing supply of new government borrowing, so sterling is flowing into London houses etc.

  • rate this

    Comment number 367.

    I've become increasingly impressed with Clegg too.
    He's helped to form a Government, he's supporting economic rebalancing, he's been instrumental in taking low earners out of tax, he's been at the forefront of strengthening regulation of the banks, he would also like to introduce a wealth tax and higher income tax on high earners.
    And he's resilient.
    Not bad!

  • rate this

    Comment number 366.


    Lord Turner was (& so is) an abject disaster at the FSA (just like Mervyn King). If either of these guys had a grasp of the awful mess they were making and had an ounce of integrity they would have resigned. Being wise after the fact is being a charlatan and fool. If we accept ANYTHING he says - ever - we are bigger fools than he!

    This man was part of the team that crashed the system.

  • rate this

    Comment number 365.

    355.PC "No-one seems to realise that this is the longest depression we have ever experienced"

    Many of us here have been saying just than since 2008 - we generally use the Long Depression of 1870's as a precedent. Scan back through my postings since 2008 and you will see that your "no-one "needs to be qualified!

    Witnessed a very poor performance, at LSE a week back, by the man you praise

  • rate this

    Comment number 364.

    360. Grounder

    As the option to lend to the government still exists, I would rather it didn't, but we are we are. Why would it change in the near term or change our current growth?

    Capacity does not necessarily convert into utilised production. Again there is no quick fix there. A long hard slog, but agree that it is doable.

  • rate this

    Comment number 363.

    plotinus @359
    I expect net exports of aerospace goods, cars, earth-moving equipment, and pharma to increase over the next 3 years as the investments listed @284 come on stream.
    Also Government help for exports has increased.
    Even Moulton bicycles have been awarded a £500k contract to supply £10k pushbikes to China.
    Yes, a generational shift.
    Peter Close@358 I don't and I agree.

  • rate this

    Comment number 362.

    All for All @354
    shared liberation in conscience
    The conscience which is in the heart of everyone saying, "love your neighbour as yourself", is at the heart of our shared activity.
    If only we could tap into it more we would surely achieve more as a collective in our common interest.
    I think the ethics of value are also key to such a positive, high view of human nature.

  • rate this

    Comment number 361.

    Adair Turner gave a brilliant speech at the Philadelphia "Fixing the Banking System for Good" Conference in April:
    It's on the pm website and I'm not convinced that their perhaps over-zealous ideas are realistic but Turner's half-way house is do-able - and he was runner-up to Carney, who may be like-minded!

  • rate this

    Comment number 360.

    @356 Tim Browning
    "So why would you expect a change in the trade balance of any significance."

    That's a complex question. Broadly, I take the view that UK trade follows financial flows rather than driving them. We have the capacity to produce more, at an economic price, but foreign holders of sterling prefer other uses over importing our goods (lending to our government and buying our assets).

  • rate this

    Comment number 359.

    I'm sure that the BoE are looking for the recovery to broaden out. This will require us dealing with our lack of productivity growth & our inability to make the things we consume
    This will require not just companies investing in their own development but also the structural re-balancing of our economy
    Is our banking system a sufficient transmission mechanism
    This is a generational shift

  • rate this

    Comment number 358.

    alan @353
    What makes you think the velocity of money circulation will increase without ridding ourselves of the private debt overhang. ~ we can get rid of the public debt by re-purchasing it with new debt-free money. This is effectively ongoing Q.E which is probably going to happen anyway with banks capital requirements hiked up to 30% - meaning their leverage is 3:1 - c/w RBS's 50:1 in 2008

  • rate this

    Comment number 357.

    I hope so too!
    The Norwegians have kept their exchange rate down by investing the proceeds of oil abroad (selling their currency to buy foreign currency) thus protecting their non-oil industry.
    As a result they have built up a huge sovereign fund and run a substantial surplus on investment income in their current account.

  • rate this

    Comment number 356.

    349. Grounder

    what have we replaced that lost production with?

    Not a lot was my contention. Replacing it with a unregulated unfettered banking system I most would agree was a a slight failure. :)

    So why would you expect a change in the trade balance of any significance.

  • rate this

    Comment number 355.

    No-one seems to realise that this is the longest depression we have ever experienced - far longer and deeper than the "Great Depression". We are way below 2007's GDP, still bouncing along the bottom of the trough and look like doing so for a couple of decades. Without some wage inflation and a change to the money creation system - i.e. castration of the banks - we are going to continue doing so!

  • rate this

    Comment number 354.

    plotinus @342
    "no escape
    (but in)
    ability to transcend"

    For 'recovery' far beyond 'back to 2008'

    We transcend limitations of experience, beyond or in accordance with teaching, source & authority determining which, whether of Mammon for our enslavement or of Good for our shared liberation in conscience, 'granted' the power of reason (to see the difference), & of care (to know value in our lives)

  • rate this

    Comment number 353.

    I suspect our political leaders and the BoE are hoping that growth will increasingly come from increasing corporate investment, construction and net exports in the next five years as well as consumption.
    peterclose @348
    Money supply doesn't necessarily have to increase if the velocity of circulation increases sufficiently.


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