“Cecily, you will read your Political Economy in my absence,” orders Miss Prism in The Importance of Being Earnest. “The chapter on the Fall of the Rupee you may omit. It is somewhat too sensational.”
Oscar Wilde should have stuck around to read the business pages of a recent newspaper: they make the Indian rupee look like a steel girder. Take the headlines by the close of trade in the City today. Iron ore plunges to a 10-year low. Mining giant Glencore has another shocking day on the stock market. When Wall Street opens at lunchtime, every single company on the Dow Jones slumps. Copper, that leading indicator of the state of the world economy, continues to drift lower and lower. And the cost of a barrel of Brent Crude oil has dropped so low that you can buy one, should you wish, for about the same amount as a pair of kids’ roller skates.
Businesses are beginning to pull in their horns too. Rio Tinto announced today that it was cutting back on its investment plans – not so surprising since it’s fundamentally a mining company struggling with falling prices for the stuff it digs up. But high-street anchor Marks & Spencer also announced a drop in its capital spending. And the week began with a survey of Britain’s manufacturers showing they expect both output and employment to stagnate.
So much for the latest headlines: let’s put this in some context. China, one of the most important motors of the world economy since the crash, is beginning to sputter. Christine Lagarde, the boss of the IMF, has warned again and again that the world is heading into a “new mediocre”, while the Bank of England’s chief economist, Andy Haldane, talks of “the emerging markets crisis of 2015”.
Let us not take these predictions as bound to come true. Ask instead a more uncomfortable question: if the world economy is heading into icy headwinds, how well insulated is Britain?
The answer is: not enough. David Cameron came into office talking about how he was going to “rebalance” the economy away from London and the south-east, while George Osborne promised a historic boom in business investment and an export renaissance. The chancellor then foresaw a “march of the makers”. These were all good things to wish for, but none of them have been delivered. Infrastructure spending has poured into the same old corner of Britain, whether it be for the London Olympics, the new Crossrail, the Thames Tideway or the Channel Tunnel Rail Link. Business investment has picked up a little very recently – but has fallen far short of the 2010 optimism. And the main thing driving growth in the British economy is not manufacturing and certainly not exports but consumer spending. What’s more, the Office for Budget Responsibility’s forecasts – issued last month – for continued steady growth for the rest of this decade rely on British households carrying on splurging. As the OBR itself points out: “Available historical data suggest that this persistent and relatively large household deficit would be unprecedented.” Two things can be said about this. Either the UK economy is going to keep growing even as the Bank of England starts to raise interest rates and the rest of the world slows down – on the back of household spending. Or households aren’t going to be spending anywhere as much as the OBR assumes – with the result that the UK economy doesn’t grow that much at all. Neither outcome would give Mr Osborne much to boast about.
The chancellor can argue that he has improved financial regulation from the failed light-touch regime of New Labour. True enough, but he has not split up too-big-to-fail banks, and he and his regulators have been weak on banking competition. As last week’s stress tests show, the Bank of England has been far too understanding of the City’s claims to be resilient. If this is what amounts to an insurance policy, let’s pray we don’t need to use it.
