A winter of discontent to follow our summertime blues?
As this pitiful summer draws to a close what have we got to look forward to, politically and economically speaking, in the autumn and winter ahead? Well, the party political conference season starts this week. That will come up with nothing new other than poor old Gordon trying to hang on to his job by trying to decide whether to say sorry or to brazen things out. The other parties will be crowing about their luck. I am sure 18 months ago David Cameron thought he had as much chance of becoming PM as Margaret Thatcher making a comeback - but now... What you can be sure is that no one will have any quick fixes for what is happening in the economy and, whichever way you look at it, it aint good. But just how not good is it really?
Well, our own Chancellor of the Exchequer has come out with a pronouncement that things are going to get as bad as they have ever been for 60 years. Oh dear! Sixty years ago the country was bankrupt, we were cap in hands to the Americans, who after the WW2 were the only country in the world with any money. Many British people were close to starving and we had just finished a winter where power cuts were rife. Food was severely rationed, more so than even in the war years. Is this really what Mr Darling foresees?
It was an extraordinary foolish thing to say and has had a dramatically bad effect on confidence, just at the time when confidence is what is needed. No serious economist or commentator (clearly one needs to exclude the Chancellor here) is predicting a recession as bad as those suffered in the 1990s, 80s or 70s. Indeed most think that outright recession could still be avoided altogether, although with ill-judged government statements like that such a fate may yet befall us.
Then of course we have the OECD's [Organisation for Economic Co-operation and Development] prediction that Britain will be in recession in the last two quarters of this year. In other words, we are already in it. Well if that is the case we may be now experiencing the worst of it. However, our growth rates have been better than most other G7 countries and we are much better placed to withstand this economic storm than previously.
As to which of the G7 countries goes into recession first is really not too important. What is certainly true is that we are all experiencing severe difficulties with high fuel prices, high food prices and the credit crunch. As the OECD acknowledges, Britain's problem is exacerbated by very high house prices that now have much further to fall than in other countries where the banks have not been so incompetent with their lending.
More recently we've seen frightening 'Car-maggedon' headlines screaming about the 'disaster' in the car industry - confirming, of course, that our country's economy is going to hell in a handcart. At first glance this really scared me for the suggestion was that August's car sales were the worst since 1966. Many of the tabloids had double page depicting automotive icons of the World Cup winning year, such as MK 1 Cortinas and Minis. These truly were dangerous and foolish pieces of journalism that ignored major changes within the industry.
It is true that August 2008 car sales figures were the lowest since 1966. However most of you will remember that up until 2001 UK number plates changed in August. A car's age was instantly recognisable by its number plate. This practice had endured since the early 60s and throughout that time August was the Christmas of the motor trade. Not since 2001. The figures are bad of course and it would have been fair to say these were the worst figures since 2001. Any comparison with previous years is ridiculous. But then why let the facts get in the way of a good story? Of course people are buying fewer cars at the moment, they've got less disposable income but that's not the same as foretelling a return to powdered eggs and ration books. The global economy is stalling and so our economy is stalling, but there's not reason to hit the panic button
Kickstarting the economy
Typically in times of pronounced economic slowdown we see a reduction in interest rates to get things moving again. So why didn't interest rates go down? With lower interest rates, people find it easier to borrow, spend their money in the (your) shops and the economy picks up.
The trouble is, when we spend too much money in the shops there are too many people trying to buy too few goods and therefore the prices go up. This is of course called inflation. The Government has you, the retailers, to thank for inflation not being far worse than it could have been. Our retail industry really is one of the most efficient anywhere in the world and has done much to save us from the worst effects of inflation that are affecting some other countries.
The problem policy makers around the world are facing is that, even though the world economy is slowing sharply, inflation persists because of high food prices and high oil prices. Unfortunately whatever the Bank of England does with interest rates here in the UK the world prices for oil and food will not be affected.
This has given rise to calls that, on this occasion, we should ignore inflation and get money back into the economy to get it moving again. This may happen. But not yet. Inflationary worries appear to be too great. But why?
Does inflation really matter?
Of course we all hate that fact that prices go up but if they go up broadly in line with our wages should we worry? Yes actually. We need to worry a lot. The UK does not live and work in a bubble insulated from the rest of the world. We are competing with other countries for our wealth and if we lose the battle against inflation then we lose out to our competitors. It is precisely this problem that dragged the UK down from being the second richest country per capita in the early sixties to the twelfth position that we now occupy. This is how it works. Prices go up in the shops. Workers see that their wages don't go as far and so demand more money from their employers. Employers give way and pass on their costs to the consumer, [the workers] and the workers demand more money. Of course this cycle can go on indefinitely except for one thing. We are not the only customers of our goods and services. We need to trade with other countries for many of the essentials and luxuries upon which we now rely. If the price of our goods keeps going up by more than our competitor nations, they will stop buying. Without their foreign currency flowing into the UK we will not have the money to buy their goods.
There are countless examples of inflation ravishing economies. The most high profile and current example is Zimbabwe where a loaf of bread now costs five billion Zimbabwean dollars. Inflation was the curse of the British economy throughout the 60s and 70s. It was inflation that helped destroy the Wiemar Republic in Germany that led to the rise of Hitler and the Nazis.
Therefore we should expect no substantial relief on interests rates until the price of oil and food falls or at least stop rising. The threat of inflation and the continued lack of availability of credit is going to keep the lid on economic growth throughout the western world until at least 2010. But business will continue to be done and many firms will continue to prosper. It will only be the weaker organisations that will fail and, whilst personal wealth may not grow, it may even fall by a few percentage points, people will still be richer than they were in the nineties, much richer than they were in the 80s and the austerity of the 1940s is now just the stuff of history books.
If you have any questions on the economy and what it means to our industry please do email me at: firstname.lastname@example.org I won't have the solutions, but at least I can explain some of the jargon, and counter some of the more outrageous headlines.