Adjustment not meltdown

After several months of a sliding housing market, retailers are now claiming that high street sales are wilting, the 'credit crunch' seems to be affecting more and more households and businesses, while key opinion surveys in manufacturing, services and construction all predict contractions in activity.

As if this were not enough, policymakers have virtually no room for manoeuvre. The chancellor, already spent and borrowed up to the limits of his Golden Rule, cannot relax fiscal policy while the Monetary Policy Committee is constrained from cutting interest rates by a jump in inflation, sparked largely by imported oil and food.

Yet in the Treasury’s monthly survey of forecasts, none of the 44 independent organisations surveyed in June expects a technical recession this year, and only one predicts negative growth in 2009. The median GDP growth rates for this year and next are 1.7% and 1.6% respectively.

However tough it might feel, and however uncertain the outlook, what we are experiencing is a correction not a collapse, an adjustment rather than a meltdown.

On reading even the quality press, the uninformed could be persuaded this is the end of civilisation. But an economy that has recorded 63 con-secutive quarters of positive growth, has more people in a job than at any time in its entire history, has unemployment at levels last seen more than 30 years ago, and where interest rates and inflation are still historically low, is not about to fall off the edge of a cliff.

The fundamentals of the economy are sound, certainly more so than in 1974, 1979 or 1989, when output growth stalled and then fell. Inflation at times exceeded 25%, interest rates topped 15% and unemployment touched three million.

In some ways, the recent boom was based on shaky foundations, an excess of consumption and borrowing by both public and private sectors. Getting the rebalancing of the economy right will take time and to look for the quick fix now will only create problems further out; the classic boom-bust formula.

We have to accept slower growth and pressure on living standards for a year or two. Raising the stakes with overblown rhetoric will not help.

Dennis Turner is chief economist at HSBC