Cautious Analysts Temper Major's Economic Tidings
EVEN before government statistics confirmed the fact, the happy sound of cash registers was relaying the message: Britain's longest recession since the 1930s was over at last.
But rejoicing is being tempered by warnings from economists and captains of industry that the recovery may be short-lived. Official confirmation of the "green shoots" of recovery came in the form of Treasury data showing that in the last 12 months, economic growth was a real 0.6 percent. The figures supported the views of retailers who reported their best sales figures since 1989.
The glad tidings enabled John Major, the prime minister, to say that "the pendulum is swinging towards growth, and industry is facing unparalleled opportunities." Although analysts generally endorse Mr. Major's claim that the recession is over, most think the recovery is fragile.
Some of the sharpest warnings have come from business leaders who are imploring Major and his ministers to safeguard them against another recession. Peter Morgan, director general of the influential Institute of Directors (IOD), said on April 27 that there was a risk of Britain reentering the "dreary pattern of economic decline" unless government and industry work more closely together.
Nigel Pain of the National Institute of Economic and Social Research supported Mr. Morgan's cautious view: "So far, so good. But the medium-term prospect is clouded, and much will depend on the policies the government follows."
Many economists hold that Norman Lamont, chancellor of the exchequer, must take early steps to slash the British pounds50 billion ($78.7 billion) deficit (9 percent of gross domestic product) projected in his March 16 budget. Others say Mr. Lamont, in addition to cutting public spending, will have to order another increase in taxes beyond his March budget's British pounds17.5 billion ($27.5 billion) hike if public sector borrowing is to be brought under control. Ruth Lea, chief economist in London of Mit subishi Bank, said Lamont would be "wise to plan for possible additional tax measures" when he delivers his next budget in the autumn. "Britain's fiscal position is more perilous than it has ever been in peacetime," wrote The London Times.
As Major and Lamont try to chart a course of sustained recovery, one of the heaviest loads is the country's more than 3 million unemployed. John Philpott of the Employment Policy Institute puts the combined cost of falling output, lost tax revenue, and soaring welfare benefits resulting from unemployment at between British pounds50 billion and British pounds60 billion. The government is encouraged by the fact that after 33 months of increases, unemployment in February and March fell by a total of 51,000.
Recovery in Britain will also depend heavily on what happens elsewhere in Europe.
In its latest quarterly survey, the Confederation of British Industry (CBI) said economic downturns in Germany and France (both important export markets) were likely to continue.
British exports have risen in the past four months, partly because of the forced devaluation of the pound last September. But the CBI warned that investment and employment in manufacturing were continuing to fall.
"We can't yet be fully confident that the economy is on a firmly upward path," said Sir David Lees, chairman of the CBI's economic affairs committee.
The IOD's message was unexpectedly somber, and has served to check the government's attempts to project a mood of optimism. Morgan's view, widely shared by 2,000 delegates to an annual conference in London, is that the benefits of earlier economic recoveries have been squandered. The "party for business," Morgan said, had been guilty of "macroeconomic mismanagement" of a high order.
IR Alistair Grant, chairman of the Argyll Group of food retailers, told the conference that the government had made two fundamental errors: "too strong a foot on the accelerator in the late 1980s and too savage a foot on the brakes in the early 1990s."
Major has his own political reasons for stressing evidence that the recession is history. The Conservatives are facing a by-election on May 6. Regardless of political calculations, the government faces an uphill struggle if it is to recapture the support of industrial leaders.
The International Monetary Fund reported on April 26 that Britain must increase taxes or make deep cuts in public spending if the growing deficit is to be curbed. The IMF also cast doubt on the government's ability to meet inflationary targets next year and warned against further cuts in interest rates.