Roger Bootle, MD of Capital Economics, argues that the depth of the downturn shouldn’t lead you to lose all sense of proportion
The government’s heavy borrowing leaves it with a few options, which are not mutually exclusive. One route is to raise taxes considerably, but this would make it harder to get growth going again. Public spending could be cut. Or we could have a sustained period of weak monetary policy, leading to very low interest rates and exchange rates. That would boost exports and, ironically, credit-fuelled spending. A lot depends on how quickly the adjustment is made; too sudden and it would be a disaster.
Though the situation is bad, and will be for quite some time, people exaggerate the gloom on the downswing just as they do the optimism on the upswing. Think of the utter despair of the late 1970s and early 1980s, followed by the celebrated “transformation of Britain” four or five years later.
Comparisons with the “lost Japanese decade” also miss the mark. To begin with, the property and stock market bubbles in Japan were far greater than we’ve experienced. Also, people forget that the lost decade wasn’t that lost: Japan continued to grow during that period, slightly faster than Germany on average.
I’m not expecting the grim conditions to continue forever. When recovery comes (and you’ve got to be cautious about how strong that recovery will be), the shape of the British economy is likely to be very different from what it has been. We’re likely to see significant growth in net exports due to a lower pound, so manufacturing businesses which export directly or compete with importers in their home markets should benefit.