Sajid Javid: The deep truth beneath Labour's green shoots
Sajid Javid is a private investor in small businesses. He was previously a senior Managing Director with Deutsche Bank in London, specialising in developing countries. He lives in London with his wife, Laura, and four young children. In this Platform argues that Labour is deliberately overplaying the evidence of economic recovery and, as a result, failing to take the action that we so dearly need.
Watch out! The green shoots of recovery...here they come. Flash Gordon has saved the day again. Ministers are falling over themselves to tell us that the worst of the recession is behind us, and that we have begun to ride the positive gradient of a classic "V" shaped recession. They point to last month's National Institute of Economic and Social Research (NIESR) report which said that the recession hit its trough in March; the purchasing managers' index (PMI) for the services sector, which rose from 48.7 to 51.7 (above the critical 50 level that marks the divide between expansion and contraction - the first time since March 2008); and the recent Halifax survey that says that average house prices bounced back 2.6% in May. Most of all, minsters say we shouldn't just take their word for it, just look at the financial markets' own judgement: the UK stock market has just had an outstanding quarter.
Clearly, any signs of recovery are to be welcomed. However, with good reason, many economic commentators remain sceptical of all this evidence. There are some serious issues and uncertainties out there that remain unaddressed, and could so easily throw any potential recovery off track. Instead of a classic "V" shaped recession, as Labour would dearly like us to believe this is, we could in fact head into "W" or even "L" shaped territory.
My fear is, since this Government has so clearly set out to win the next election through whatever lies it chooses, it will spin these "green shoots" as a full blown recovery and ignore the serious economic issues we still face. Last week's shocking announcement that there will be no Comprehensive Spending Review is testament to that. There will, sadly, be more dishonesty and and colossal irresponsibility to come from Labour, meaning eventual recovery will take far longer.
There are at least four key reasons to remain concerned.
First, let's not get too carried away with rising stock markets. Despite the rises during the last quarter, major stock markets are still way off their peaks. It's not surprising that they are rising given that governments around the world, led by our very own and the US, are pumping money into their economies at a frenetic pace. Businesses can't put the billions of freshly minted pounds to work in such a short time, so it's unsurprising that this money is finding a home in the financial markets. What matters far more is how, and when, this cash is eventually put to use in the real economy.
Second, the relentless rise in Gilt yields could choke any nascent recovery. The benchmark 10-year Gilt yield, for instance, is currently at its highest level since early February. As the government continues to flood the market with more and more public debt, yields will invariably continue to rise. The government response is to buy its own debt, leading to greater market fears of inflation, thereby actually pushing yields ever higher. Since all sterling loans are priced with Gilt yields as their reference point, companies (in particular, the vitally important SME sector) and individuals will find it increasingly prohibitive to borrow. Furthermore, as Gilt yields rise, public spending on debt servicing rises too - leading to even more government borrowing to plug the gap. A vicious circle that this government has no plan to deal with.
Third, there is scant evidence that major banks are opening the lending tap. It is not because that the banking industry isn't profitable. Far from it. Thanks to near-zero global interest rates, huge injections of liquidity by central banks, a less competitive environment and helpful changes to accounting practices, many banks could well have a fantastic year. However, given that they still need to rebuild their capital positions and expect to see further significant losses in their existing loan portfolios, then why make fresh loans? A recent engineering employers survey in the UK showed that over 45% of firms had seen an increase in the cost of their finance and only 4% had seen an increase in the availability of credit over the last three months. It's the same story for most businesses throughout the country - they remain extremely cautious and continue to shed employees and cut investment. Quantitative easing (set at £125bn for now, likely to rise to £150bn in July) was intended to boost lending, but is not doing so. Perhaps it's got something to do with the fact that, thus far, Gilts sold back to the Bank of England by foreigners outnumber those sold by UK institutions by 2 to 1.
Fourth, we also can't ignore what history tells us. A recent study by two eminent US economic historians shows that if you date the start of the current recession to April 2008 and that of the Great Depression to June 2009, then this recession, thus far, fully matches the early part of the Great Depression. Industrial output has fallen by the same amount. Our stock market has actually declined by a far larger amount (taking into account the recent rise) than the corresponding period in the Great Depression. The authors sum it up starkly: "...we are tracking or doing even worse than the Great Depression...This is [so far] a Depression-sized event". However, the good news is, because of what we have learned since the Great Depression, I believe we can avert such a disaster again. Problem is, this government is showing little willingness to implement the lessons we have learned, as there implementation could, in its view, jeopardise a Labour election victory.
As we have seen over the last few weeks, Labour will stop at nothing to win the next election. Until we form the next government, we can only continue to be honest in the face of Labour's lies. But, there is no question that in our first few days of power, we will have to take emergency action to change the disastrous economic track that Labour has set us upon.