The Week

The Week, 23/01/09

Hope in the frozen wastes

Perhaps there really are green shoots of economic recovery peeping out of the frosty ground. While it is best not to be premature, especially when the slide into recession in the UK has been confirmed, there is no harm in facing the future with a little hope.

The green shoots phrase gained notoriety nearly 20 years ago when it was used by the then Chancellor, Norman Lamont. He was generally derided and, indeed, there was a long slog still to come.

Politicians have sensibly avoided the phrase ever since but memories fade, especially among politicians, and the green shoots scenario has again been raised by business minister Baroness Vadera this month. The inevitable uproar should deter anyone else in government from making the same tactical error, though employment minister Tony McNulty was rash enough this week to suggest he could see light at the end of an admittedly long tunnel.

Now, I have castigate, even mocked, Norman Lamont in this column in the past but the simple fact is that on the occasion of his green shoots remark he was actually right. A couple of years later, when recovery was underway, one could look back and detect those early signs that had seemed visible only to Lamont at the time.

As job losses rise, as employment numbers fall, it is insensitive to talk about green shoots. Nonetheless, the Bank of England, with less of a political axe to grind than the government, claims to have seen ‘a few encouraging signs’ in the first few days of 2009.

According to minutes of its monetary policy committee meeting on January 7 and 8, ‘sentiment in some markets had improved a little’ since the December get-together. Equity markets had risen internationally and investment grade corporate bonds (the ones that companies are pretty sure to repay in full and on time) had been issued successfully.

Most importantly, Libor rates had fallen. That is the rate at which banks lend to each other. Remember, the banking crisis began when the Libor market seized up, so any indication that the interest rate cuts are feeding through is particularly welcome.

Spending by consumers had held up remarkably well, the Bank noted.

Somewhat more serious was the sharp fall in the value of the pound, which has made a nonsense of projections in the Bank’s previous two inflation reports in November and August. It is slightly disconcerting that the minutes take a more amiable view than I do.

To be fair, the Bank does comment on the sharp and ‘remarkably synchronised’ downturn in the world economy with a marked reduction in international trade and points out the dangers of more nasties being produced in the current round of commercial bank results.

Two points leap out from the end of the summary of the minutes. The first is the admission that there was a case for leaving rates unchanged. As the Bank says, previous interest rate cuts take time to work their way through into the economy. After months of desperate measures, by the Bank and the Government, to stabilise an economic system in freefall, this is the first real indication that enough may have been done.

The second point is that the minutes note that a half point cut in interest rates had been priced into the markets and that to cut by less or more could be taken badly. I felt this time last year that the MPC was being bounced into interest rate cuts. Here we have a clear admission that the market can dictate to the Bank of England rather than the other way round.

Eight members of the committee voted for the half point reduction while super dove David Blanchflower wanted a full point knocking off. No doubt Blanchflower will press his case again at the next meeting, on February 4 and 5, but I get the feeling that his colleagues are starting to feel that enough is enough.

Northern rights

Certain sections of the press have predictable been in uproar over bonus payments to Northern Rock staff who have kept the sinking vessel afloat during extremely difficult times.

These staff members have worked through a year of knowing that the company is bust. They have seen their colleagues fired and known that, with the bank contracting, their turn could come any day.

Thanks to their diligence in demoralising circumstances, taxpayers now underwrite a good deal less than the £26bn that the government originally pumped in. This is not a bonus for failure. This is a reward for undoing a good deal of the mess created by their former bosses.

Rodney Hobson
Author, Shares Made Simple and Small Companies, Big Profits