Vince Cable has form for predicting economic disaster, so you take notice when he says that there could be another one on the horizon, even if he qualifies it with an anecdote from his professional life:
I use the word “could”. I am always mindful of the day 20 years ago when I was greeted in my role as chief economist at Shell with a plaque, in Arabic, which translated meant “Those who claim to be able to forecast the future are lying even if, by chance, they are later proved right”. The reputation of economic forecasting as a science, which makes astrology looks respectable, reflects the same scepticism. And that scepticism was greatly reinforced by a total failure of standard economic models based on efficient financial markets to anticipate the last disaster.
Writing in the Independent, he outlines the factors which could indicate that all is not well: the high level of debt, the asset bubbles which have been created particularly in housing and the international economy, particularly any shock waves from a Chinese slowdown.
One side-effect of keeping economies growing through cheap money and credit creation through quantitative easing has been the generation of asset bubbles, especially in property markets. Britain demonstrates the problem in an extreme way, magnifying underlying imbalances between housing demand and supply. Double-digit housing inflation is not merely creating appalling social problems and division between classes and generations but grossly distorting investment from productive activities to property holding. The Bank of England has tools of macro-prudential management to curb this inflation but the extreme timidity in using them reveals the high level of dependence on this precarious and dangerous form of growth.
There is another problem too. Governments and central banks have limited room for manoeuvre. Having pushed monetary policy to the limits of what currently passes for acceptable and public debt to what is regarded as sustainable levels, there is no obvious place to go if we hit another recession. Unfortunately the risks of that happening are rising.
There was a bit of self-awareness when he talked about himself being one of the government ministers who rushed on to the telly at the first hint of decent economic news:
My current sense of unease is sharpened by the big disparity between backward and forward-looking indicators. This week’s employment figures continued the remarkable run of positive data which has had economic ministers, including me when in government, scrambling to be the first in front of the TV cameras. The UK recovery is a really good story and surprisingly job-rich (even if productivity poor). But employment is a lagging indicator. Recent, forward- looking, surveys of business confidence suggest a deteriorating outlook, with the worst figures since the 2008 crisis.
You can read his whole article here.
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8 Comments
Im afraid I never bought into the “Sage of Twickenham”myth, Cable has shown dreadful judgement onec to often. Clearly China is in big trouble, perhaps due for Revolution. We dont know how the Economy will react once Interest Rates start going up. But we do have zero inflation, wages rising & unemployment falling like a stone -its hard to read that as impending disaster unless we are actually addicted to gloom.
Unemployment falling like a stone? Not quite sure on that, zero inflation looks like a Japanese slump and as for wages see the longer term picture. I largely agree with what Vince is saying – cheap money, housing bubbles etc but he’s one for often talking a good game. What was the record of his government?
The outcome of almost any referendum in almost any country depends substantially on the popularity of the government at the time, which depends substantially on the state of the economy, as perceived by individuals in the electorate.
Therefore “Recent, forward- looking, surveys of business confidence suggest a deteriorating outlook, with the worst figures since the 2008 crisis.” means that the PM had better have the EU referendum soon or he will lose it.
‘imbalance between housing supply and demand’.. er no, Vince, the imbalance is with housing availability. If all the housing we have were available for occupation then we could be part way to solving the shortage, by that I mean the significant number of properties held in some investor’s portfolio, who has no intention of renting it out as ‘over any 10yr period, even through recession, property values always rise faster than most other forms of investment’. We need to re-think property taxation to make it less attractive as a simple investment. Maybe, just maybe, the handing over of Business Rates to Councils may make it easier for councils to identify culprit property, and to find the courage to go for it under existing powers, and apply business rates on any property where council tax is not being paid.
Hi Peter- I wish yours was the answer to this so called housing crisis. In Huddersfield the council have included house building on one of the countries most beautiful municipal golf courses only to serve commuter traffic to Leeds and Manchester, in their local development plan. The town centre itself has become an absolute wreck because people can’t afford to go shopping there anymore. We really are in need of town centre affordable council housing projects.
Much is made of our poor productivity levels. Vince repeats this mantra. I’m unconvinced. I really feel there is something wrong with the statistics. It doesn’t make sense that no improvement in productivity is being made in the face of a rapidly increasing minimum wage and other costs.
Vince is right to warn of an coming economic storm just as he was before the 2008 financial crisis – and for the same reason. Overall debt is growing unsustainably and will eventually crush whoever is holding it when the music stops.
Osborne makes a great song and dance about getting the deficit down but he’s only talking about the government deficit and ignoring overall debt including the private sector’s which is up by 20% of GDP since 2008. That means it has, on average, contributed very nearly 3% to annual spending creating lots of jobs for builders, for car salesmen, for academics (student debt is one of the biggest categories) and many others creating the illusion of a prosperous economy.
Debt is fine if it’s spend on productive investments that will eventually pay it off but this mostly isn’t. Mostly it’s gone on bidding up property prices and other asset bubbles. Hence the prosperity is wholly unsustainable and built on sand; eventually the debt pile will overwhelm the economy.
Osborne may prattle on about the “Northern Powerhouse” and the “March of the Makers” but it’s all empty spin; I see no evidence he understands how the economy works. Not good!
Hi Gordon. I agree with you about Vince. He has a wonderful understanding of the British economy, and with his communication skills should have been the leader of those party after Charles Kennedy was forced out. Mrs Thatcher destroyed the existing northern powerhouse of textiles, engineering, steel, coal mining, chemicals etc which were all mass employers of workers in favour of globalisation, north sea oil, and the London financial sector. Osbourne and his friends then blame northerners for being a drag on the London economy. His northern powerhouse seems to consist of taxi drivers, fast food shops, warehousing imported globalised products etc etc. Or am I missing something positive about northern economic development? Leeds and Manchester seem to have developed as subsidiary financial centres to London perhaps. The north east doing well at making cars ?