The Prime Minister decided yesterday to highlight dangers of a fresh global economic crisis. This will impact on the UK construction sector. How much? Who knows?
His words printed in the Guardian were: “Six years on from the financial crash that brought the world to its knees, red warning lights are once again flashing on the dashboard of the global economy.”
That was a sentence designed to gain maximum media attention. In that it was a success. And he seemingly chucked all but the kitchen sink into the pot of potential problems as he went on:
“The eurozone is teetering on the brink of a possible third recession, with high unemployment, falling growth and the real risk of falling prices too. Emerging markets, which were the driver of growth in the early stages of the recovery, are now slowing down. Despite the progress in Bali, global trade talks have stalled while the epidemic of Ebola, conflict in the Middle East and Russia’s illegal actions in Ukraine are all adding a dangerous backdrop of instability and uncertainty.”
But what of investors in major construction works? They need confidence that long-term prospects are good. They will assess David Cameron’s comments. If they think they provide fresh insight they’ll recalibrate their view of risk.
This might mean that marginal projects, mainly in the commercial sector or in London high-end residential development, would be reassessed. Intriguingly, if London is seen as a safe haven in a global economic storm, residential developments may be viewed favourably.
But it’s hard to know how seriously investors will take Cameron’s comments. They are pretty well informed on economic risk and most likely will be better placed to judge the impact than the Prime Minister.
They may dismiss his remarks. He does after all display a rather loose adherence to economic convention, as illustrated in his written party conference speech. He seemed to claim the nation was paying down its debts. It isn’t. Worse still the latest data available to Cameron at the time showed public sector net borrowing excluding public sector banks was £11.6 billion in August 2014, up £0.7 billion on the August 2013 figure, hinting if anything at a rising deficit. Debt, meanwhile, had risen by best part of £100 billion over the year.
How ironic, you might think, that Cameron has then the brass to chide his opposition leader for omitting to mention the deficit. Politics eh?
All that aside, even if Cameron’s comments on global economic woes are dismissed on the grounds that they providing no new information, the chances are that the comments will linger in the thoughts of investors.
That the Prime Minister chose to deliver such a warning to the nation will have effects. Investors will be assessing whether the public perceives this as fresh insight and how seriously that might impact on consumer behaviour. The UK recovery is supported by growing consumption. If nervousness about the future increases caution and leads to a drop in spending, growth will be weakened. This probably is where the most serious fallout lies.
Cameron’s comments do however have echoes of the highly publicised warning of Alistair Darling in August 2008 when he was Chancellor. His holiday interview with Decca Aitkenhead of the Guardian was explosive. I welcomed his comments at the time and the piece is well worth re-reading.
There is one big difference between Cameron’s comments and those of Darling. Despite being proved right Darling faced a huge barrage of criticism at the time, which I and a few others found perplexing at the time and find the more so with hindsight.
There is another difference. Cameron’s comments are considered by most to be purely political, aimed at deflecting potential unfavourable economic and political news ahead of the General Election.
The Conservatives face a second by-election loss to UKIP. Meanwhile, the government’s reduction of the deficit (That’s deficit, not debt, David) has been significantly less impressive than originally planned, despite lower interest charges on the debt than expected resulting from interest rates staying lower for longer.
In truth Cameron’s comments also do add little new to the knowledge of the global economy. We’ve bumped and bounced between crises, especially in the Eurozone, for more than six years now. And you only have to consult Wikipedia to see how Japan’s “Lost Decade” after the 1990s recession is rapidly becoming “Lost Decades”.
Yes the data are perhaps worse than a couple of months ago. But should we take more note of Cameron’s comments yesterday than, say, the regular comments made over the past year or so about secular stagnation by Harvard Professor Larry Summers, who served as Secretary of the Treasury for President Clinton, or the persistent warnings of many other eminent economists?
No. But they should not be dismissed.
Those of influence in the construction industry might wish to reflect on how they responded to economic warnings, how they prepared themselves and how they sought to guide the government ahead of the Great Recession into which we plunged six years ago.
I’ll consider that and some of the lessons we might draw in future blogs.