Vericool Finance

Even by the standards of Bob Monkhouse Syndrome by Proxy, whereby the most reviled national characters inevitably come into vogue if they hang around long enough, the transformation of Peter Mandelson from rank underdog to national superman is remarkable.

Those who not long ago would rail about him in the least elegant of language now nod sagely and say that he is the only minister they trust on the economy, in much the same way they talk of Kenneth Clarke and Vince Cable. The man is a force of nature.

Having swept back from hobnobbing with the Rothschilds in Corfu to take charge of the country, the Business Secretary has certainly been out to woo the City. Reportedly dismayed by what he regards as Alistair Darling’s defeatist approach to European legislation that could “destroy the multibillion pound private equity and hedge fund industry”, he has promised to redouble efforts to fight off Brussels.

Mandelson’s championing of financiers is hardly surprising given his love of any well-connected circle where money, glamour and power mix. He is deemed one of the few senior Labour people with who the City identifies.  Indeed, the eclectic group comprising “Peter’s Friends” includes a host of big business names:  including former BP chief Lord Browne, entrepreneur Jamie Palumbo, and Wall Street Journal boss, Les Hinton.  The powerful family behind the Indian Tata Group, owners of Jaguar Land Rover, are also close friends.

Much good it did them.  How can Mandelson style himself a friend of business when he was prepared to jeopardise thousands of jobs at Jaguar Land Rover by refusing to all the Government to stand as guarantor to enable the company to secure funding. The episode reveals Mandelson’s feet of clay.  He talks of a new industrial policy to help rebuild our economy but has produced nothing substantive to back it.

And it will take a genius even more steeped in the dark arts than Mandelson to persuade a sceptical public that the Government’s handling of the MD Rover affair was anything less than an unmitigated disaster.  Motor industry leaders, it is true, are disillusioned, but Mandelson was right to play hard ball with Jaguar – the Government cannot bail out every private company that gets into difficulties.

Meanwhile, his reputation for delivering is growing in other sectors:  tourism bosses are desperate to ditch the useless Department for Culture, Media and Sport to move to his empire.  For better or worse, business leaders can’t get enough of Lord M.

Almost a year has passed since the Chancellor was accused of talking the economy down by suggesting we were living through the worst crisis for 60 years.  Now we assuredly know he was right. The latest disastrous quarterly figures from the Office for National Statistics (ONS) show the economy shrank 0.8% in the second quarter, a stat so much worse than the consensus forecast of 0.3% that City analysts were reaching into their lockers of hyperbole to describe their surprise.

Economic output has now shrunk by 5.7% in 12 months – an annual collapse rivalling the worst days of the Great Depression.  And yet the London stock market continues to sail serenely upwards, nothing up a remarkable rally of 11 consecutive days of gains.

If the economic news is so gloomy, why are markets so cheerful? One reason might be that those quarterly figures feel wrong – and may well be revised upwards as more data comes in.  Monthly GDP estimates from the National Institute, for instance, suggest that the economy reaches a turning point in the second quarter, and definitely rose in June.

The figures are certainly contradictory.  By the ONS’s own estimate, Britain’s high streets are in a state of rude health with sales volumes rising significantly in June – hardly the sign of an economy mired in a slump.  But, at the very least, this latest data shows that talk of imminent recovery was premature. At a plausible rate of recovery, it will take until 2012 before the economy gets back to where it was when recession began in the spring of last year.  The worst may be over but… there’s a long road ahead.

Fears of a double-dip recession are probably overdone. The consensus view is that the recession, both in Britain and globally, should be over by the start of 2010.  Bu the recovery will be neither straightforward nor swift, meaning markets are set to continue their white-knuckle ride of ups and downs throughout this year and… well into the next.

That is certainly the conventional wisdom after a fall in GDP this steep, but history shows that very few recessions last longer than two years.  And most recoveries, once they start are strong… The pattern of duration is virtually identical, regardless of the size of the initial shock.

When a recession reaches a certain size or duration, recovery is harder and more sluggish.  But it takes an awful lot to depress Keynes’s animal spirits for more than a couple of years.  Markets are probably right in their upbeat outlook:  capitalism seems a pretty resilient beast.

“Don’t be fooled by one month’s data” is one of the first lessons taught on any good economics course. Yet the accumulation of upbeat stats can no longer be ignored.  Rather than the odd green shoot, the economic landscape now resembles a fragile carpet of green, and economists are busy revising their forecasts higher.

The most weighty of the green-shootists is the National Institute of Economic and Social research.  If the NIESR is right, and they have been in the past, there’s a good chance that official GDP figures could show a flattening in the second quarter and a return to growth in the third.  Good grief!  The Chancellors’ much-derided Budget forecast could turn out to have been right all along.

Perhaps there is an economist’s recovery but, with large numbers of job losses still to come, the pain for many ordinary Britons is just beginning.  Meanwhile there’s a danger that we lose something crucial amid all the green spouting.  Momentum for reforming the financial sector and for rebalancing the UK economy was strong in the depths of crisis.  Now it is palpably slipping away… on the slenderest of pretexts.

Forget green shoots, GMB union leader Paul Kenny said, what we are actually seeing is “greed shoots”.  The “recovery” seems to consist largely of bankers getting “the financial gravy train back on the tracks” – witness the recent huge payouts at Barclays.  Yet it is clear that the banking system is not yet out of the woods.  The ECB warns of a further bank writedowns totalling $283bn this year:  a bleak outlook.

There is now a big risk that central banks and governments will move too swiftly out of recession-mode strategy and begin reversing their supportive monetary and fiscal policies.  There were hints of such exit strategies at the last G8 meeting.  Yet there is still meltdown potential, especially in Europe.  Latvia, for example, is a ticking time bomb.

Some economists think that the world has dodged a bullet.  The risk of an all-out Great Depression… has receded, but historical analysis by economists Barry Eichengreen and Kevin O’Rouke gives pause for thought.  The bad news is that this recession fully matches the early part of the Great Depression.  The good news is that the worst can still be averted.  But we shouldn’t delude ourselves.  The path to full recovery is likely to be long, hard and uncertain.

The recession ended in May.  Whether or not you believe that to be true, the one thing Gordon Brown hasn’t had to worry about recently is the economy, which is staging something of a fightback.

It looks like output will start to grow again by the end of the year.  But the recovery will be sluggish, and could be short-lived – and swingeing job cuts and business insolvencies could make it feel far worse next year.  So what are we to make of the bizarre appointment of Sir Alan Sugar to the House of Lords as enterprise tsar? A serious man for serious times, no doubt.

Sugar seems to have a lifelong gift for boarding sinking ships, leaving computers for property and property for politics.  Yet, as he has shown on The Apprentice, at least he is comfy on camera – which is more than the PM can say.  How Gordon Brown must envy him.  He doesn’t have charm.  There’s no sign of any emotional intelligence.  His sense of humour is oddly stunted and he’s stubborn, arrogant and mouthy. And yet the public not only love him, but back him in their millions with their remote control.  But will he get results?

Sugar’s stated aim is “to help out businesses and act as a kind of giant Dragon’s Den… although not with my money”; he plans to act as an intermediary between banks and companies.  But that may be as empty a promise to the average small business as every other emergency enterprise package:  you only get the cash if you can show you don’t need it.

Sugar’s recent track record in business hasn’t exactly been brilliant, and he’s not always the most prescient forecaster:  “Next Christmas, the iPod will be dead, finished, gone, kaput,” he predicted in 2005.  But there’s a lot more to him than boardroom bluster.  The Amstrad PC genuinely revolutionised consumer electronics in Britain, and that alone makes him a business visionary.  But that was a long time ago and you’d think the less-than-happy experience of Lord (Digby) Jones in Whitehall would have dulled Brown’s enthusiasm for bringing bumptious businessmen into the big tent.

You can’t help thinking the PM has missed a trick.  Who better to knock the banks into line than Sugar’s sidekick, Margaret Mountford?  The strategic application of that sceptical scowl and cocked eyebrows would soon stop them coming up with another fiasco like subprimes. Never mind Lord Sugar, bring on lady Salt.

On the face of it, it is clear why Standard & Poor’s has cut Britain’s debt outlook from “stable” to “negative” for the first time in decades and threatened to strip us of its cherished AAA rating for the first time ever.  After all, new stats show that government borrowing surged fivefold in the year to April, while tax receipts slumped 10%.

S&P warned that the UK’s ratio of debt to GDP could be about to double to 100% and stay there – and they might be right.  On the other hand, these are the same people who brought you triple-A rated collateralised debt obligations, rock-solid Icelandic banks – and failed to predict any of the financial crises of the past 20 years.  Ratings agencies always accentuate the book and exaggerate the bust, and this latest offering is typical of their output:  a risible piece of guesswork.

That said, it’s not too hard to spot the gigantic hole in the UK’s public finances,  and it doesn’t help that the Bank of England’s quantitative easing strategy has meant that it’s busy buying back the Government’s own debt from lenders – underpinning and distorting the price of gilts.  Ernest Saunders went to prison for doing something similar.

S&P aren’t saying anything that hasn’t been well documented by any number of other worthy bodies – including the IMF.  The S&P downgrade matters, because if we lose our AAA rating, our problems will be much worse.  Foreign investors buy two-fifths of our government debt, and many of them are only allowed to hold paper with a pristine rating.  That’s scary.

Given the current political disarray, it was no surprise that the Treasury couldn’t come up with a convincing response to S&P.  They need to – and fast.  When it comes to getting people to lend money, Britain has historically relied on two factors: its strong and stable governance, combined with a history of paying our debts back.  There is no fundamental reason why that can’t continue.  Even the chasmal fiscal deficit of 12.4% projected for 2009-10 is affordable as a one-off, but only if investors are told how the Government is going to pay them back eventually.

Instead, Britain is suffering from a credibility gap.  With the expenses scandal and uncertainty over the state of the election causing political paralysis, and neither party remotely clear about their future tax and spending plans, the UK looks financially exposed and politically weak, and that’s perfect ground for ratings agencies to wreak their usual havoc.

They say you know the tide has turned when the last great pessimist throws in the towel.  So there was some significance in George Soros’s recent pronouncement that apocalypse has been avoided. “The economic freefall has been stopped, the collapse of the financial system averted,” said the billionaire investor whose graphic warnings of imminent doom shocked the world last year.

And all around, it seems, there is optimism that the worst of the slump may be behind us.  Commodity prices are rising, indicating that global manufacturing demand may be picking up; investors seem willing to stump up cash for banks and companies; even the OECD now indicates that a sharp bounce in April activity suggests that the best-case scenario – a V-shaped recession – is no longer out of the questions.

But, there’s a big difference between an economy getting worse more slowly and one that is on the path to recovery. Even if modest signs of improvement develop into rising output by the autumn, there is still a strong risk of relapse into a double-dip recession. The bank of England recognises as much:  its move to step up quantitative easing with an extra £50bn shows it believes the banking system remains fragile. And unemployment, up by almost 250,000 in Q1 (the biggest quarterly rise since 1981), still looks worrying.

We can’t assume the international outlook is altogether rosy either.  It would take a sustained rise in Chinese exports to suggest that demand in the rest of the worlds has turned, yet they fell by 3.5% between March and April.  And US property prices are still falling, while losses at Wall Street banks continue to mount. As Gordon Brown never tires of telling us, this crisis began across the pond.  And that’s where it will end.

Green shoots have been proliferating in the hothouse of the financial markets, but step outside and the climate is very differen.  Bank governor Mervyn King’s withering summary of conditions suggests an economy that, rather than shooting, looks shot.  Recovery won’t begin until 2010, King said, and even then there are pretty solid reasons for questioning if that will be sustained.

The coming years will certainly be rough, yet the nation today is markedly different from the shabby, defeated country we were in the 1970s.  Britain, in fact, seems determinedly cheerful.  Why?  Perhaps because, although things are bad, no other country seems to be doing markedly better; or perhaps because – having dug ourselves out of a hole once before – we feel we can do it again.