Don’t let the economic gloom-mongers get you down

The gloom has been relentless. The three months since Labour’s victory in the general election have been dominated by warnings of a fiscal black hole and downbeat messaging on the state of the British economy more generally. With signs of faltering consumer confidence, it’s no surprise that some commentators have been quick to pin the blame on the new government.
Pessimism has not been confined to the British economy. Worries over global prospects have been on the rise, with investors spooked by the potential for a US recession and, as a result, anticipating increasingly large cuts in US interest rates in the year ahead.
In reality, however, the global economic outlook is a little more rosy than this picture suggests. Fears over the US economy in particular appear overdone.
Investor concerns about the US have centred on its slowing labour market. Unemployment has risen this year — and by an extent that in the past has been associated with recession. But context is key.
Against the backdrop of stronger growth in the labour force, the US economy has not been creating enough jobs to keep up with the rise in those available to work. Importantly, layoffs have remained low, suggesting that the threat to consumer spending may be more limited than markets believe.
Businesses appear correspondingly sanguine. A US soft landing is seen as the most likely outcome by far, based on businesses’ responses to the regular Global Risk Survey from Oxford Economics. Less than one in ten respondents think a sharp slowing of the US economy is in prospect over the coming 12 months.
This is telling, given the speed with which businesses typically perceive marked shifts in the economic outlook. The pandemic is a prime example. When surveyed a month after Covid-19 was declared a pandemic, businesses had already downgraded their expectations dramatically. On average, they expected the global economy to shrink by almost 3 per cent in 2020, within a whisker of the eventual outcome.
Businesses are not reporting any dramatic shift in global economic conditions. A period of solid, albeit unspectacular growth is thought to be in prospect.
While there are clear risks to this benign outlook for the global economy, the dangers shouldn’t be overstated either. A Middle East escalation is an obvious threat, amid increased hostilities between Israel and Hezbollah and with next week marking the first anniversary of the Hamas attack on Israel. Under plausible assumptions, however, a temporary disruption to energy supply — even if historically significant in magnitude — would have short-lived consequences for financial markets and the economy.
True, the US election has the potential to provide a more enduring impact on global activity. A Donald Trump presidency is widely viewed by businesses as an even greater threat to growth than developments in the Middle East.
The near-term consequences of the US election for the global economy are limited, however. Any increase in tariffs would most likely be phased in, as was the case with the imposition of trade measures against China during the first Trump presidency. The global impact of a trade war would be delayed and gradual.
Even in the UK itself there are some reasons for cautious optimism. For example, significant reform of the government’s self-imposed spending constraints may be on the cards — a change advocated by the OECD last week. Should the result be increased public investment, and greater government borrowing rather than austerity, this month’s budget could prove less of a drag on the British economy than feared.
Both overseas and domestically, prospects may be more positive than the gloom-mongers would have you believe.
Jamie Thompson is Head of Macro Scenarios at Oxford Economics