George Osborne’s window of opportunity to revive the British economy in time for 2015 is rapidly closing
Time is starting to run out for George Osborne. Two years from now, Britain will be gearing up for a spring 2015 election in which the state of the economy will play a crucial role. For the Conservatives to go one better than they did last time and win an overall majority, the chancellor needs a decent story to tell. The first triple-dip recession on record is certainly not part of the script.
Back in 2010 the narrative went like this. Labour left us a right old mess, but we are taking immediate steps to deal with a record peacetime deficit. Public sector cuts will hurt, but the private sector will fill the gap left by the retreat of the state, and then some. Within two years, the economy will be humming and the deficit will be dropping fast.
Those who had their doubts about this notion – known as expansionary fiscal contraction – have been proved right. There has been no flowering of the private sector and the economy has gone sideways for two years. The latest survey of the service sector from CIPS and Markit strongly suggests that the final three months of 2012 saw output decline afresh.
Whether this would technically amount to a triple-dip recession (purists would say two successive quarters would be required to satisfy the textbook definition) is neither here nor there as far as the politics are concerned. Osborne needs to have the economy growing at fair lick by the end of 2013 – and preferably sooner than that – if he wants to win the argument with Labour’s Ed Balls in 2015.
The opposition case is that the coalition inherited an economy that was weak but on the mend, but then aborted the recovery through premature and over-aggressive attempts to reduce the budget deficit. Osborne’s pitch (somewhat revised since the heady days of May 2010) will be that the economy was in even worse shape than thought, but that the coalition is finally getting on top of it. But for that to wash he has to have some solid evidence – lacking thus far – that the pain has been worth it.
As things stand, 2013 looks like being a repeat of 2012. There are four sources of growth: consumer spending, investment, government consumption and exports, and the outlook for all four remains challenging. Consumer spending rises when workers have more money in their pockets to spend or feel confident enough to borrow more, but wages are growing more slowly than prices and households want to cut their indebtedness, not increase it. Without robust consumer spending, businesses hoard spare cash rather than investing it.
Exports offer one possible way of breaking out of the vicious circle and provide the most likely source of growth in 2013. The US appears to be on the mend, while the news from Asia has also been better. South Korea – seen by some analysts as a bellwether for the global economy – released strong manufacturing figures last week. Even so, the recession in the eurozone – which accounts for 50% of the UK’s visible exports – will limit any boost from this quarter.
That leaves the government itself, where the pace of public spending cuts is scheduled to intensify during 2013. Unless consumers’ real incomes are boosted by falling inflation, businesses spontaneously decide to invest, or there is a sudden and rapid pick-up in the global economy, it is hard to see where the growth is going to come from.
Indeed, economists such as Michael Saunders from Citigroup see national output growing by just 0.4% in 2013 and by 0.5%-1% in 2014. It will, Saunders believes, take until 2016 for the level of GDP to return to its pre-recession peak of early 2008 and, because the last few years have seen the population increase, until the end of the decade for GDP per head to make up lost ground.
What does this mean? It means a feel-bad factor, and a massive political headache, for the chancellor.
Morrisons misery isn’t just rooted in exotic veg
The jungle drums are beating and the message being conveyed is bad news for Morrisons chief executive Dalton Philips: his supermarkets failed the Christmas tucker trials and he’s in danger of being voted off the show.
The grocer’s shares started the new year with a hangover as retail analysts returned to their desks with the view that UK’s fourth-largest supermarket had continued its losing streak over Christmas. The gloom couldn’t even be lifted by its decision to hire cheeky I’m A Celebrity … Get Me Out Of Here! presenters Ant & Dec to put in some shifts behind its fish and meat counters in its next advertising campaign.
As he approaches his third anniversary at the Bradford HQ, Philips is in a precarious position. The business was firing on all cylinders when he inherited it, but is now going backwards. He is certainly grappling with a tougher retail environment than his predecessor Marc Bolland, who took over Morrisons after the worst of the post-Safeway-takeover meltdown. But in the current climate a brand once famous for its “no frills” price-sensitive approach should be thriving – as discounters Aldi and Lidl, and competitor Asda are.
Some think Morrisons’ problems stem from its absence from the online grocery market, at a time when rivals are reporting huge uplifts in internet sales. So far it has only dabbled, making a £32m investment in US internet grocer FreshDirect two years ago.
Quite what it has learned from what was billed as “America’s profitable answer to Ocado” remains to be seen. Let’s hope it’s not incompetence: last week it emerged that the New York-based firm had suffered a website outage after forgetting to renew its domain name. D’oh!
But the internet’s not the whole story. Morrisons has watched other windows of opportunity close – from selling non-food ranges such as clothing and electricals, which was a huge moneyspinner for Tesco until the recession hit, to convenience stores. It only recently pressed the button on its M Local chain.
Last year Philips focused on sprucing up older supermarkets, with “misty” veg displays laden with exotic ingredients such as celeriac and kohlrabi. As one Sun reader (and unimpressed Morrisons shopper) put it: “I never have and never will require lemongrass.”
So take your pick and blame Morrisons’ woes on the internet, its belated convenience debut or for getting ideas above its station. The themes are part of the story. But perhaps the truth is that it’s not possible in such a competitive industry for all members of the big four to win at the same time; there must be a loser. After years of rapacious supermarket expansion there are too many mouths to feed. In recent years Tesco, Sainsbury’s and Asda have all taken their turn in the wilderness, the question is, is Philips the man to get Morrisons out of there?
High stakes for 4G auction
Was the Office of Budget Responsibility (OBR), for once, on the money when it predicted that the auction of 4G airwaves could raise £3.5bn for the threadbare public purse? It will be a few weeks before we find out – the final line-up of bidders will be confirmed on Monday, but the winners won’t be revealed until March.
George Osborne hopes so, having factored the entire sum into his autumn statement to flatter the national deficit. So does Labour: it has already promised to spend the spoils on new homes.
The man running the process, Ofcom chief executive Ed Richards, is more concerned about the long term benefits of 4G than the size of the payday. He wants the mobile networks to have enough money left over after the auction to install the kit that can actually use the newly acquired spectrum to speed up internet access on our smartphones.
The price set by the national statisticians is two and a half times Ofcom’s £1.36bn reserve price. In the Netherlands, the most hotly contested of recent 4G auctions, operators stumped up £3bn, nearly eight times the reserve. But then Mexican telecoms billionaire Carlos Slim was writing the cheques for one of the bidders, KPN, which he hopes to use as a launchpad for the European market.
The UK has no surprise entrant looking to grab the most valuable spectrum. But neither did Ireland. Its auction in November, where three of the four bidders run networks in Britain, exceeded the reserve by five times. Maybe, for once, the OBR’s predictions will look too pessimistic.