April 25th, 2013
The GDP data provided the Chancellor George Osborne with solace. The 0.3% quarterly rise allowed him to suggest the figures provided evidence that the economy is healing.
Had the figures shown a decline he would have been fending off a huge amount of flak. That’s politics.
But the figures mean little in the grand scheme of things unless they work some magic on the animal spirits within the economy.
The economy is probably rising very gently, but far too slowly for comfort. And there is little to guarantee that we will not see another quarterly drop in national output drop before the economy finally lifts from this depression.
It is the longest depression for more than a century. And with the full impact of austerity still to bite there remains the likelihood of a very bumpy and uncertain take off.
No one is quite clear where we should expect to see growth, especially as demand from our biggest trading partners, by and large, is also being squeezed by austerity.
For construction the GDP data seem to fit the glum background. The GDP index for construction hit 98.0, the lowest level since Q1 1999. Five years earlier it stood at 120.8.
And most pointers (though not the RICS latest construction survey) seem to be for a continued fall in output, at least this year.
The GDP first estimate figures are open for some quite big revisions, so should be taken with caution. But even taking that into account, they don’t look good for construction.
This is twisted irony. For those in construction there is a deep-seated belief that this industry should be playing the lead role in driving the economy.
Yes, it should. But it will not unless demand is there.
There are things construction firms can do to increase demand, but as the industry is structured it is in the main a passive recipient of derived demand. Someone else has to want what it provides, have the finance to cover the cost and the willingness to take risks.
That rather begs the question, why would private sector investors pump cash into the fruits of construction now?
The private housing market is dysfunctional. If it wasn’t there would be no need for unprecedented interventions by the Government.
The market for shops and offices is going through a once in a generation transformation thanks to the internet and changing pattern of work and shopping. That is before we take into account the impact of the very weak economy.
There is limited experience in financing infrastructure in the private sector outside of that which is regulated and the appetite remains a bit fitful and fanciful.
Yes there are pockets of need and opportunity that the private sector will grasp willingly. But these are limited and with better investments elsewhere it is pretty clear that a wait-and-see policy is a likely approach to be taken by prudent investors in such a risky climate.
That leaves the Government as a client or as a promoter.
I would argue when the animal spirits within the private sector are so skittish it is time for the Government to step up with a bit of backbone and lead the way. That was the lesson of the post-War era.
Well the Government probably believes it is stepping up. But it’s record to date, and this includes to a slightly lesser extent the previous administration, is to fiddle with the existing market.
The policy response has been largely focused on providing compensation from the public purse to encourage firms to do what the Government wants. This is exceedingly interventionist and not in my book very free market.
What is more it seems from the outcomes to be a classic case of the weight of unintended consequences potentially exceeding the weight of intended consequences.
From what I can deduce it has proven a very expensive way to do what appears to be not a great deal, except improve the corporate base and profits of some firms.
In fairness we will never know how bad things might have been without the interventions. But to attempt to prop up a dysfunctional marketplace for construction’s output is full of risk.
No. If you want something built, build it rather than trying to bribe someone else. This to me is far better than providing ill-directed incentives however well intentioned.
Simplistic? Maybe. Keynesian? Probably. But to me it makes complete sense for direct Government investment in construction.
The fruits of construction have an exceedingly long shelf life. They last beyond economic cycles. Impressively the value has a habit of increasing over time and the benefits of well-targeted construction pave the way for more efficiency within the rest of the economy.
The fruits of construction provide jobs.
The fruits of construction improve lives.
The fruits of construction are a totem for confidence.
The fruits of construction can be traded between the state and the private sector. We have seen a huge divestment of state assets over the past 30 years.
So why not directly invest in construction now?
That is increasingly a ridiculous response.
The cost of debt is clearly not an issue. The Government can buy debt at less than the rate of inflation. In real terms it is being paid to take someone’s hard earned cash.
If the Government is worried about the stack of debt, why? We had huge investment post-War when the national debt was far greater than it is today.
Surely, then, the reason the Government is not investing is fear over the deficit?
This is absurd. Do we really think the gnomes of Zurich or the slick traders in London and New York would give a damn about an extra few billion quid set against tangible assets that can be sold on if necessary, especially as creating them would reduce social security spending and increase taxes.
And, if the Government is a bit squeamish on this point, it could always invests through a not-for-profit limited-life arms-length vehicle that controlled the assets built and was mandated to sell all its assets by some fixed date. This would give confidence to the markets.
No the reason would seem to be dogma.
This to me appears to be the same dogmatic attitude that the current Chancellor accuses his opposition predecessors of adopting. Doing something that is not right, but that fits with a theoretically constructed view of the world.
History would tend to suggest that state investment in construction does not crowd out the market. If anything the data suggests the reverse. Look at the peak periods of house building.
This Government talks of how Government needs to be more business-like.
Well, the Government is uniquely placed in the market to deliver construction goods at a massive discount, once it realises reduced benefits payments and increased taxes.
Any business worth its salt would not shirk at such a golden opportunity.
If as the Government says we need more houses, we need more roads, we need better infrastructure. There will seldom be a better time to invest in them than now from a national perspective.
Put aside the issue of ultimate ownership, put aside fears over picking winners, put aside dogma.
Let’s ignore issues of private or public ownership, they are fluid. Let’s invest in the future and build today what we need tomorrow.
Frankly, in a decade’s time when hopefully the economy really as healed, the Government can choose if it wishes to rein back on its capital spending and sit smugly there knowing it invested at the right time.