A Tale Of Two Countries

20/05/2011 at 12:21 pm

What is going on in Britain?

A few weeks ago this blog noted the underperformance of the UK equity market, and drew attention to falls in consumer confidence which set the country apart from its developed world peers. Was it possible that something about the UK economy was causing us to lag the recovery in the rest of the world?

Data released yesterday offered completely contradictory answers to that question. On the one hand, the Nationwide measure of consumer confidence failed to recover and remains at levels last seen in the teeth of the recent contraction. On the other hand, the monthly CBI survey showed rising optimism and buoyant order books in the manufacturing sector, and retail sales figures got a boost last month from the weather and the royal wedding.

So which data is right? Is Britain a country that will recover along with the rest of the world, or stagnate?

There is a way of reconciling the apparent contradiction between these different pieces of information – and it’s not hopeful. In a world where economic data largely tells us what happened weeks or months ago, confidence surveys are an exception in that they afford a glimpse of what might lie ahead (“leading indicators” in the textbook jargon). So while the CBI series and the retail sales data give grounds for hope today, weak consumer sentiment suggests a more difficult tomorrow.

Of course, recoveries are patchy things. In 1984, for example, confidence and growth both took a knock on the back of the miners’ strike, but recovery from the rather severe recession of 1980-81 soon picked up speed again to become the famous late 80s boom. Consumer nervousness could always turn round and see us “recover the recovery” in a similar way.

Today, however, a major strain on confidence is the squeeze on real incomes arising from modest wage growth in the face of relatively high inflation. There is no way of telling for certain how long this squeeze may last, though it has already proved far more persistent than the pickets of a generation ago and is expected to last a while longer.

Growth forecasts for the UK have already been revised down. Absent that turnaround in confidence, there is a chance that our growth blip could become a double dip.


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