John Humphrys asks: Are ordinary people feeling the effect of economic recovery?
It’s now official. The economic recovery has finally ‘taken hold’. That, at least is the view of Mark Carney, the new Governor of the Bank of England. But do people yet feel that things are getting better for them? And will our rosier prospects be enough to give the coalition a fighting chance of winning the next election?
When he delivered his quarterly economic forecast on Wednesday, the Governor was strikingly more optimistic about the British economy than he had been back in August and more so than most other economic commentators still are. After five years of virtual stagnation following the global financial crash, our economy (according to the Bank of England) is set to grow at 1.6% this year, at 2.9% next year and at 2.5% in 2015 before settling down to an average of about 2.7% thereafter.
Of course we have all learned to take economic forecasts with a pinch of salt and certainly no one expects the economy to settle down to a steady rate of growth at 2.7% or any other figure: the era of boom and boost is definitely not over. Nonetheless, Mr Carney’s figures are the most buoyant we have yet seen. The average forecast for British economic growth next year is 2.2%; the IMF thinks 1.9%; but the Bank thinks it’ll be almost 3%.
Other figures are cheering too. The most recent inflation figure is down from 2.7% to 2.2%; employment, at 29.95 million is at an all-time high and unemployment, at 7.6%, is falling faster than previously expected. Indeed the Bank now expects the rate to fall below 7% around this time next year, a good eighteen months sooner than imagined as recently as last summer.
Mr Carney said: “For the first time in a long time, you don’t have to be an optimist to see the glass as half full. The recovery has finally taken hold.” The Chancellor, George Osborne, took up the theme, though putting it rather more cautiously. He said on Twitter: “More jobs, fewer unemployed and lower inflation all very welcome. Economic plan’s working but there’s still a long way to go.”
But whatever the economists’ figures are saying it is also the case that the feeling of recovery has not yet taken hold among most people. This is hardly surprising. Average living standards, which started to become stagnant over a decade ago, have been falling over the last five years and continue to do so. Over the last year average earnings have risen by only 0.7%, that’s less than a third of the rise in inflation (2.2%). The fall in the inflation rate is certainly good news for hard-pressed families but it is still the case that their disposable income is falling and that for them the cost of living is likely to cast a shadow over any good news about the country’s economic future.
This discrepancy between improving overall economic prospects and continuing financial hardship among individuals and families will define the political battle between now and the general election in May 2015. In the light of the more cheerful economic news, Labour has ceased to attack the government on its overall economic strategy, not because it thinks the government was right after all, but because it realises it won’t persuade voters now that things are looking better. Instead, it is campaigning on what it calls the ‘cost of living crisis’. Ed Balls, the shadow chancellor, said in response to the Bank of England’s new forecasts: “As the governor is rightly warning, prices are still rising faster than wages and new figures today show working people are on average £1,600 a year worse off since David Cameron came to office.”
Mr Balls’ boss, the Labour leader, Ed Miliband, successfully sought to set the political agenda back in September by attacking the energy companies for raising prices way in excess of general inflation and by promising a 20-month price freeze if Labour were elected in 2015. The Prime Minister dismissed this as a ‘con’ but the coalition has sought ways itself to tackle the problem of rising bills. The Chancellor is expected to come up with his own ideas on energy bills when he delivers his Autumn Statement next month. The government has also had the water companies in its sights and only this week Mr Cameron ordered his culture secretary, Maria Miller, to challenge mobile phone companies about their charges.
Behind this political skirmishing over the cost of utilities there is a substantial policy issue at stake. The energy companies, in particular, say that the big increases in their charges are necessary because the government has imposed on them obligations to make our energy generation greener and, even more, because they have the responsibility to invest in the new generating capacity which is essential if the lights are not to go out in a decade or so’s time. The only source they ultimately have to finance all this is the consumer and that’s why the bills are having to go up so much. Indeed a report this week suggested we could expect our energy bills to rise at a much faster rate than general inflation for the next seventeen years.
Some politicians, including Nick Clegg, the deputy prime minister, have floated the idea that the consumer should be relieved of some or all of this burden and that the money should be found instead from general taxation. The logical extension of this idea would to re-nationalise the utilities. But one of the reasons for privatising them in the first place, it was argued, was that governments anxious not to raise taxes tended to put off the necessary investments instead and that’s why we ended up with such creaking infrastructure. This argument seems likely to be rehearsed all over again in the coming months.
What will be fascinating to political observers in the run-up to the next election is whether the cost-of-living issue will trump economic recovery as the most salient issue or vice versa. But even if the government succeeds in making voters focus on recovery there is a potential political danger for them in what now looks like a faster recovery than had been expected. It’s about what happens to interest rates.
Since the financial crisis, interest rates have been at an historically incredibly low level. Sooner or later they will have to rise again. The question is: when? Back in the summer Governor Carney introduced his new policy of ‘forward guidance’ on the issue, linking interest rate rises to the fate of unemployment. He said they almost certainly wouldn’t rise until unemployment had fallen below 7% and this was not expected until 2016 (safely after the election). Now it seems it could happen in the last six months before the election.
What is likely to alarm the chancellor, who has responsibility for the Tories’ election strategy as well as for the economy, is that the recovery has ‘taken hold’ largely on the back of increased consumer spending, much of it financed by increased debt (necessarily so, given that earnings are lagging inflation). Some of this debt is dependent on the buoyant housing market, itself stimulated by very low interest rates. Once rates start to rise, many family budgets will start to take a hit. In other words, there could be a new twist to the cost-of-living crisis.
So, even if the recovery has indeed ‘taken hold’ its impact on British politics remains intriguingly uncertain.
What do you make of the economic good news?
- Does it make you more inclined to vote for the coalition parties or do you think the cost-of-living issue is more important?
- Who do you think should pay for investing in our utilities, the consumer or the taxpayer?
- How badly are you likely to be hit once interest rates start to rise?
- And in general do you share the Governor’s belief that we should now all look at the glass as half full or does it still seem to you half empty?
