Morning:
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An odd thing about recessions is that people looking back on them make them out to be much worse than they seemed to be living through them at the time.
This year's crop of New Year messages is full of dire warnings that output is set to plunge by more than it did in the 1980s and possibly by as much as it did in 1973-74. Typical of the breed was New Star's Simon Ward, who points out that the industrial output of the G7 nations is now running at 7% below the peak of last February, which puts it almost on a par with the slowdown of 1980-82 though not yet as bad as the 12% decline of 1974-75.
Speaking as one who was at work throughout the 1970s from the Tories' three-day week near the beginning to Labour's winter of discontent at the end, through all the trade union unrest and the deal with the International Monetary Fund to prop up the country, our current problems look nowhere near as bleak as things looked then.
But even in the midst of the problems of the 1970s as, for example, in the three-day week when the power was switched off on a rota basis for three hours in 12 every day, for the six weeks or so that it lasted you simply adjusted and got on with life, in that case by candlelight. Only in retrospect did these things appear odd. And even the bleakness one did feel is relative. No doubt someone who remembered the 1930s would have thought the 1970s were easy by comparison.
So although the decline in industrial output sounds dramatic, one has to question whether it actually means much for Britain. Manufacturing accounts for well under 20% of the economy, so a decline in industrial output is likely to hit us less hard than countries such as Germany, where it accounts for a much larger share.
In addition, we already know that one of its major segments, motor manufacturing, is in dire straits because new vehicle sales have plunged by more than 25%. It is not unreasonable to think this slowdown accounts for a major part of the overall decline as far as the UK is concerned. Other parts of manufacturing not connected with the car industry keep saying they are in better shape.
The motor industry malaise is easy enough to explain. Money is tight - or people and companies think it is, so they have decided to save by putting off the purchase of new cars. They can do this with relative impunity because today's second-hand cars are so reliable it is easy to keep them running for six months or a year more than originally planned. But they cannot put off replacement for ever and, given that the sales slump has already been running for six months, it is not unrealistic to expect it to come off the bottom by midway through the year.
You can apply this to a lot of other things. When people get apprehensive about economic prospects, they rarely cancel projects altogether but they most certainly do defer them. Plans get put on ice for six months on the basis that managers want to see what things will look like then. If they are still bad, they may defer for a further three months. But the point is that in the end they can defer no longer, and they have either to go ahead or to cancel. More often than not, they go ahead and when they do that is a sign things are picking up. So again, though everything is frozen at the moment, there are reasons to believe they will start to pick up again by summer.
This is where I part company with most of the bleak economic forecasts that have been in such abundance over the Christmas period. There is little doubt there was a sharp slowdown throughout the autumn, but this seems to have prompted many forecasters to assume the trend will continue downwards at the same rate - just as a year or two back, many of them were similarly predicting things would continue to go up at the same rate.
What seems far more likely to me is that the hyperactive media reporting of every bit of bad news has combined perversely with modern industrial methods where everything is "just in time" and orders can be cancelled at the touch of a button or with the sending of an email to create a new kind of slowdown.
Businessmen have been made cautious by the media, and have the power to express that caution in cancelling orders and deferring investment, and basically they all decided to do so at the same time, in the days after the collapse of Lehman Brothers. Whereas a generation ago, it would take 18 months to slow down the global economy, modern technology and communications mean it can be brought to a halt in three months. And that is more or less what has happened.
I believe people are confusing the abruptness of the slowdown with its severity. Thus the optimistic forecast for 2009 is based on the fact that we have reacted to the adverse circumstances much more rapidly than in previous times of economic disturbance, so we are likely to get to the bottom much faster. This means we should be in a position to start the recovery much sooner too. Therefore, while the first quarter of this year is likely to be difficult, things should begin to pick up after that.
