Editorial The Economist, 18.03.2017
The past decade has been marked by a series of false economic dawns. This time really does feel different
Economic and political cycles have a habit of being out of sync. Just ask George Bush senior, who lost the presidential election in 1992 because voters blamed him for the recent recession. Or Chancellor Gerhard Schröder, booted out by German voters in 2005 after imposing painful reforms, only to see Angela Merkel reap the rewards.
Today, almost ten years after the most severe financial crisis since the Depression, a broad-based economic upswing is at last under way. In America, Europe, Asia and the emerging markets, for the first time since a brief rebound in 2010, all the burners are firing at once.
But the political mood is sour. A populist rebellion, nurtured by years of sluggish growth, is still spreading. Globalisation is out of favour. An economic nationalist sits in the White House. This week all eyes were on Dutch elections featuring Geert Wilders, a Dutch Islamophobic ideologue, just one of many European malcontents.
This dissonance is dangerous. If populist politicians win credit for a more buoyant economy, their policies will gain credence, with potentially devastating effects. As a long-awaited upswing lifts spirits and spreads confidence, the big question is: what lies behind it?
All together now
The past decade has been marked by false dawns, in which optimism at the start of a year has been undone—whether by the euro crisis, wobbles in emerging markets, the collapse of the oil price or fears of a meltdown in China. America’s economy has kept growing, but always into a headwind. A year ago, the Federal Reserve had expected to raise interest rates four times in 2016. Global frailties put paid to that.
Now things are different. This week the Fed raised rates for the second time in three months—thanks partly to the vigour of the American economy, but also because of growth everywhere else. Fears about Chinese overcapacity, and of a yuan devaluation, have receded. In February factory-gate inflation was close to a nine-year high. In Japan in the fourth quarter capital expenditure grew at its fastest rate in three years. The euro area has been gathering speed since 2015. The European Commission’s economic-sentiment index is at its highest since 2011; euro-zone unemployment is at its lowest since 2009.
The bellwethers of global activity look sprightly, too. In February South Korea, a proxy for world trade, notched up export growth above 20%. Taiwanese manufacturers have posted 12 consecutive months of expansion. Even in places inured to recession the worst is over. The Brazilian economy has been shrinking for eight quarters but, with inflation expectations tamed, interest rates are now falling. Brazil and Russia are likely to add to global GDP this year, not subtract from it. The Institute of International Finance reckons that in January the developing world hit its fastest monthly rate of growth since 2011.
This is not to say the world economy is back to normal. Oil prices fell by 10% in the week to March 15th on renewed fears of oversupply; a sustained fall would hurt the economies of producers more than it would benefit consumers. China’s build-up of debt is of enduring concern. Productivity growth in the rich world remains weak. Outside America, wages are still growing slowly. And in America, surging business confidence has yet to translate into surging investment.
Entrenching the recovery calls for a delicate balancing-act. As inflation expectations rise, central banks will have to weigh the pressure to tighten policy against the risk that, if they go too fast, bond markets and borrowers will suffer. Europe is especially vulnerable, because the European Central Bank is reaching the legal limits of the bond-buying programme it has used to keep money cheap in weak economies.
The biggest risk, though, is the lessons politicians draw. Donald Trump is singing his own praises after good job and confidence numbers. It is true that the stockmarket and business sentiment have been fired up by promises of deregulation and a fiscal boost. But Mr Trump’s claims to have magically jump-started job creation are sheer braggadocio. The American economy has added jobs for 77 months in a row.
No Keynes, no gains
Most important, the upswing has nothing to do with Mr Trump’s “America First” economic nationalism. If anything, the global upswing vindicates the experts that today’s populists often decry. Economists have long argued that recoveries from financial crashes take a long time: research into 100 banking crises by Carmen Reinhart and Kenneth Rogoff of Harvard University suggests that, on average, incomes get back to pre-crisis levels only after eight long years. Most economists also argue that the best way to recover after a debt crisis is to clean up balance-sheets quickly, keep monetary policy loose and apply fiscal stimulus wherever prudently possible.
Today’s recovery validates that prescription. The Fed pinned interest rates to the floor until full employment was in sight. The ECB’s bond-buying programme has kept borrowing costs in crisis-prone countries tolerable, though Europe’s misplaced emphasis on austerity, recently relaxed, made the job harder. In Japan rises in VAT have scuppered previous recoveries; this time the government wisely deferred an increase until at least 2019.
The tussle over who created the recovery is about more than bragging rights. An endorsement for populist economics would favour insurgent parties in countries like France, where the far-right Marine Le Pen is standing for president. It would also favour the wrong policies. Mr Trump’s proposed tax cuts would pump up the economy that now least needs support—and complicate the Fed’s task. Fortified by misplaced belief in their own world view, the administration’s protectionists might urge Mr Trump to rip up the infrastructure of globalisation (bypassing the World Trade Organisation in pursuing grievances against China, say), risking a trade war. A fiscal splurge at home and a stronger dollar would widen America’s trade deficit, which may strengthen their hand. Populists deserve no credit for the upsurge. But they could yet snuff it out.
Even so, there are arguments for delay. Support for independence is strongest and growing fastest among the young. Waiting a few years until more are able to vote (and fewer of the elderly unionists are around) could boost the nationalists’ chances. And the adverse effects of Brexit forecast by most economists—which would make Scoxit more appealing—could take time to kick in.
More worrying for Ms Sturgeon, Euroscepticism is on the rise among Scots. Two-thirds either want Britain to leave the EU or would like the EU’s powers to be reduced, up from just over half in 2014. Even among the 62% of Scots who voted to Remain last year, more than half think that Brussels’s authority should be curbed. And of those who plumped for independence in 2014, a third voted to leave the EU. Stephen Gethins, the spokesman on Europe for Ms Sturgeon’s Scottish National Party (SNP) in Westminster, describes support for the EU as being in the party’s “DNA”. But it was not always so: in the 1975 referendum, when Britons decided to stay in the European project, the SNP wanted to leave. Tying the case for independence too tightly to continuing membership of the EU is risky.
And rejoining the EU might not be easy. Alfonso Dastis, the Spanish foreign minister, says that Scotland would have to “join the back of the queue” for EU membership. Spain worries that Scottish independence would embolden separatists in Catalonia. Like all EU members, it can veto applications. Perhaps partly for that reason, the SNP is said to be examining the alternative of the European Free Trade Association (EFTA), whose members include Norway and Iceland. That could allow Scotland greater access to the EU’s single market, while lessening the threat of a Spanish veto. It might also avoid annoying Scots who voted for Brexit.
At home, Scottish nationalists face a divided opposition. Labour’s position on Europe and Scotland is muddled. Jeremy Corbyn, Labour’s leader in London, was slammed by colleagues in Scotland for saying it was “absolutely fine” to hold a second independence vote. The most prominent unionist is Ruth Davidson, under whose leadership the Tories became the main opposition in the Scottish Parliament last year. Conservatism is a less toxic brand than it was, but Scots still care little for the Tories. That makes Labour’s shambolic state doubly harmful, since the Conservatives’ unchallenged position in Westminster makes Britain even less appealing. “This is what the SNP dreamed of in the 1980s,” says James Mitchell of Edinburgh University.
But if the politics look favourable for Ms Sturgeon, the economics do not. Weak last time, the economic case for independence is even more feeble today. Ms Sturgeon insists that free trade between Scotland and the rest of Britain will continue, whatever the result of the independence referendum. But this would be trickier if Scotland rejoined the EU or became part of EFTA. So would be maintaining the open border with England. And regulatory standards between Scotland as an EU member and Britain might soon diverge, complicating trade between the Scots and their biggest market. Scotland sends two-thirds of its exports to the rest of Britain, compared with less than a fifth to the rest of the EU. Edinburgh-based financial firms are already covertly installing brass plates in London, which would allow them quickly to shift operations out of Scotland.
Worries over trade would pale in comparison with concerns over Scotland’s public finances. A greying population and relatively weak tax base make it hard to balance the books. In the past these structural problems were partly offset by taxes on North Sea oil. A decade ago, when oil prices were high, such taxes were equivalent to 6-7% of Scottish GDP. But in the latest financial year they accounted for less than 0.1%. Curtailed investment in the oil and gas sector has contributed to a wider slowdown. In the year to September Scotland’s GDP grew by 0.7%; the rest of the country grew by 2.4%. Scotland’s budget deficit is now nearing 10% of GDP, more than twice Britain’s.
That is not sustainable for a small country. Scotland would have to bring the budget closer towards balance. Sharply raising taxes might cause rich Scots to pack up and move south. So spending would have to be slashed. For Scots who have already endured six years of Westminster-imposed cuts, this would be a rude awakening.
Still, the economic arguments were not decisive last time, contends Michael Keating, an analyst of Scottish politics at Aberdeen University. The question was which side looked riskier. Scots did not want to take a leap in the dark voting for independence. “This time,” he says, “they’ll be offered two leaps in the dark.”