5 obstacles to economic growth in 2011

In a recent survey of 78 of the country’s top economists, only one believed that we would see a double-dip recession in 2011. Another said there was a one in three chance, but the majority didn’t think it was likely – all rather optimistic for a profession known as the ‘dismal science’.

Now I’m not an economist, so I freely admit that I might be entirely incorrect here, but I think there are far more obstacles to growth than we’re admitting. The British economy might survive and thrive in 2011, but we’d be lucky to sail through on an upward curve of economic growth.

Here are some reasons why this could be a rocky year for the British economy, and why the sooner those 78 economists start thinking about how to run an economy without growth in the first place, the better off we will all be.

1. The cuts
2011 is the year of the big gamble. Government spending peaked at 45% of GDP, so it’s only logical that the budget cuts will affect growth. George Obsorne has put all our chips on the private sector, hoping that business can accelerate enough to offset the decline in public sector spending. That’s a dangerous bet, because this time last year it was the other way round. Government spending ended the recession – it went up 1.5% in the first quarter of 2010, enough to balance out losses in other parts of the economy and deliver 0.4% growth overall.

Bear in mind that economic growth was only 0.4-0.5% for the last quarter of 2010, and you’re likely to agree with Geoffrey Dicks, short-lived head of the Office for Budgetary Responsibility: spending cuts “logically increase the possibility of a double dip”.

2. The oil price
Forever ignored, despite the fact that the oil price is a recurring factor in recessions, including the latest. The price of a barrel of oil is $90 today, and some experts estimate it will average $90 a barrel over the course of the year, up $11 on 2010. (That’s ten dollars beyond the point at which airlines stop making money, so maybe book a train holiday this summer. A bad winter followed by an expensive spring suggests a wave of airline failures in time for the holidays.)

According to the Financial Times, the cost of importing oil at the higher price is “equal to a loss of about 0.5 of OECD gross domestic product.” When we’re counting our growth in fractions, half a percent could make the difference between growth or recession. As IEA’s Fatih Birol says, “2011 price levels could bring us to the same financial crisis times we saw in 2008.”

3. The housing market
As long as house prices are rising, home owners are essentially getting richer without doing anything. Those appreciating assets pump both money and confidence into the economy, and the property bubble has powered much of the economic growth of the last decade. Because interest rates have been kept artificially low, the market hasn’t corrected itself and prices are still too high. In 2011 they will fall, and that particular economic stimulant will no longer be available to us.

Linked to the housing market is the construction industry, and the news is mixed here too. Construction was a key driver of growth in the middle quarters of 2010, but declined substantially over the winter. New projects such as Labour’s Building Schools for the Future have also been slashed. “Construction is unlikely to drive the economy forward in the near future” says the FT.

4. The banks
In 2007 and 2008, the global banking system was shaken by a series of dramatic failures. Heavily indebted and on the verge of collapse, the government had to intervene and prop up the banks. Two years on, the financial sector remains unreformed. The derivatives market is still unregulated, the ghost mortgages are still out there, and the banks are still too big to fail. Except that this time the government is in serious debt too, so there’s no safety net.

More alarmingly, as the New Economics Foundation recently highlighted (pdf), many of the banks took out emergency short-term loans during the crisis. There is a now a gaping void between bank funds and the repayments due, which is why the banks are so reluctant to lend. The Bank of England warns that Britain’s banks will need to find “around £750 to £800 billion of term funding and liquid assets by end-2012”. This isn’t possible, so another round of either bailouts or bank failures is not unlikely.

5. Instability
What the economy needs right now is a little stability, a period of calm to consolidate, build resilience and recapitalise. But it’s not going to get it. Commodity prices are volatile, and there will be speculative bubbles in copper, oil, and foods. Interest rates will rise, and the Eurozone is in crisis. The coalition government could well come apart, or there could be a series of disruptive strikes.

Heavily indebted as it is, there is no slack in the system to absorb shock. There are very few options open to the authorities to contain failure and protect against contagion, especially since the slightest wobble will be compounded by stock market runs and currency raids. Large amounts of money are made out of instability – but only for individuals. The economy as a whole tends to suffer.

An awkward predicament:
I ought to add that it’s not all bad. British exports are up, some retailers have had a great winter despite the cold. Manufacturing is at a 16 year high, and manufacturing tends to deliver jobs. If there’s a resurgence of British industry, that would be good for employment levels as well as growth. Overall however, it looks to me like a pretty murky prospect. Can we really dodge every one of those pitfalls, and survive and thrive into 2012?

I’m not a pessimist by nature. I just feel a little like the cyclist in Heath Robinson’s surreal cartoon ‘an awkward predicament’. Here we are on a narrow bridge, unable to slow down or stop, and something rather large is coming towards us.

6 Comments on “5 obstacles to economic growth in 2011”

  1. Dr David Hill April 24, 2011 at 4:37 pm #

    The long-term is very bleak for the UK and where presently the only way is down.

    In a mere twenty-year’s time to 2031, the UK and the EU will be reaching the limits of despair when trying to capture any major future foothold in the global economic stakes. This will not be due to its people, but their governments with regard to current and medium-term policies. These policies are inherently based in the old thinking that by joining universities and business together we can achieve economic dynamism in the future. It forgets that there are three crucial elements to achieve this – the ‘Ideas’ phase, the R&D phase and the corporate commercialization phase. I say forget, as the primer of this most important energiser for economic wealth creation, the ideas phase, is not taken serious and where it is the most important and fundamental missing factor. For without world changing ideas first the process cannot even begin. The British and EU system does not comprehend what the history of S&T tells us where up to 75% of all the inventions that have made the modern world what it is today, did not emanated within the confines of our universities or advanced corporate research centres of excellence, but in the minds of ‘independent’ innovators, far remote from the final two innovation elements that constitute the ‘innovation chain’. Indeed, the ‘independent’ ideas element is more-or-less nonexistent in UK and EU economic policy. This is unlike what is emerging in the East and where they are now starting to see that the ideas people are the most important commodity that a nation has. In twenty years time therefore with this lack of foresight and new thinking in Britain and the EU, we shall in reality just be hangers-on in the global economic stakes. Therefore for its own good, the United Kingdom and the EU have to start thinking ‘out of the box’ and give total prominence and resources to the initial ideas people. For if they do not we shall see in our own lifetime the inevitable collapse of living standards, the like of which we have shall never have seen before and where our offspring will live to be totally subservient to the economic might and power of the East. That is why it is so vitally important that we create now the innovative infrastructure throughout Europe for our ideas people to flourish and thereby equip our nations with the dynamic products and services that we shall dearly need. When will the UK and the EU realise this is the big question, for it has the most overriding repercussions and consequential economic effects that have never been seen before for the 500 million+ people of the European Union? We really have to start thinking ‘out-of-the-box’ like our Eastern counterparts before it is far too late to stem the economic decline that is now upon us all.

    Dr David Hill
    Executive Director
    World Innovation Foundation

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