We are firmly into “something must be done” territory. While eurozone ministers and officials grappled again with the challenge of saving the euro, central banks announced they were swamping the markets with dollar liquidity, in a re-run of an exercise carried out during the worst of the crisis. The markets liked it.
In Britain Nick Clegg, the deputy prime minister, pledged that “Whitehall will put its foot on the accelerator” on infrastructure spending and announced “that we’re going through the nation’s capital spending plans to hand-pick up to 40 of the biggest infrastructure projects, the ones most important to growth, which will be given new special priority status”.
This was not quite what I suggested last week but it was in very similar territory. Adam Posen of the monetary policy committee (MPC), who has consistently argued for more quantitative easing – creating money through asset purchases – by the Bank of England now clearly thinks the debate is going his way.
“The right thing to do right now is for the Bank of England and the other G7 central banks to engage in further monetary stimulus,” he said in a speech.
As it happens I disagree with him on this. Quantitative easing is an emergency tool and the question of whether to use it again depends on whether you think this is an emergency of merely a period of soft growth. It may yet become an emergency but we will see. We will also see with the publication of the September minutes this week how many other members of the MPC agree with him.
I agree with Posen, however, on an another issue, which is that urgent consideration should be given to “a public bank or authority for lending to small business”. When I have suggested this in the recent past, the reaction of some people has been that this is socialism red in tooth and claw.
But, as he points out, America’s Small Business Administration and Germany’s Kreditanstalt fuer Wiederaufbau (KfW) are living examples of such bodies. His other suggestion was for an organisation to bundle up and securitize small business loans, “a good version of Fannie Mae and Freddie Mac”. Such bundles of loans could be bought and held by the Bank, in my view, in exchange for the near-£200 billion of gilts (government bonds), the central banks has on its books.
Combine these two and you have the makings of a beneficial shake-up of small business funding of the kind that did not feature even in the well-received final report of Sir John Vickers’s Independent Commission on Banking.
There are, then, good ideas around. Some, such as the additional dollar liquidity, will help calm banking fears. Clegg’s accelerated infrastructure spending has been welcomed by business and Posen’s state SME (small and medium-sixed enterprises) bank, if adopted, would support the expansion of this key job-creating sector.
So, this period of weaker growth is producing some creative thinking. Within government there is a desperate search for measures to show that, short of abandoning its fiscal plans, the government is doing its utmost to kickstart growth.
Politically, George Osborne needs something concrete to present to the Tory conference next month and when he presents his autumn statement on November 29.
How much trouble is the recovery in? Growth has weakened, and that is uncomfortable but the economy has not yet given up the ghost. Unemployment rose by 80,000 to 2.51m in the three months to July and that is unwelcome. It has, however, been fluctuating at close to this 2.5m level for the past two years.
Though it would be good to see unemployment falling, it took two years in the recovery of the 1990s before the jobless total began to drop below recession levels. The private sector is creating jobs, 41,000 in the second quarter and 264,000 over the past year, which it would not be in the absence of growth. The bad news on unemployment largely reflected what looks like an unusual bunching of public sector job cuts, 111,000 in the second quarter, which is unlikely to be repeated.
Even the retail sales figures, which might have been expected to bear the full brunt of consumer uncertainty, the squeeze on real incomes and August’s civil disorder, showed that sales volumes, while slightly down last month, were flat compared with a year earlier.
Where will growth come from in the coming quarters? It is good, as I say, that people in authority are starting to think creatively. It would be good if business investment, an expected lever of recovery, overcame the current crisis of confidence.
It would be even better if the rise in exports we are seeing – up 8.1% in value over the past year – was not exactly matched by the increase in imports.
But the recovery also needs the consumer and a key question is whether inflation, 4.5% last month, stays high or, as Posen suggests “is about to peak” and then fall sharply. If he is right, the squeeze on real incomes would be removed and consumers would be able to increase their spending.
Many, of course, are sceptical about the prospect of a big fall in inflation. The Bank’s latest survey of inflation expectations, carried out by GfK/NOP shows that people expect inflation to average 4.2% over the next year and 3.5% for the 12 months after that, in other words staying well above the official 2% target.
If inflation comes down, it would be a pleasant surprise for consumers. It would also enable them to play their part in kickstarting the recovery. As far as the government is concerned all contributions would be gratefully received.
My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.
This post originally appeared at David Smith’s EconomicsUK and is reproduced here with permission.
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