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

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

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