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‘The worst of recession is over’? That will come back to haunt Cameron

Where did we hear it before? ‘I detect the green shoots of growth’ (Norman Lamont as the economy plunged again) and ‘We’ve ended boom and bust’ (Gordon Brown just before the biggest financial crash for a century).

Equally Cameron’s ‘worst of the recession is over’ is a foolish hostage to fortune which he will come to regret. Clearly the worst of the recession is far from over, but we have been festooned with an all-out PR blitz to convince us that it is.

What it really exposes is how utterly desperate Cameron is to escape the impression (and the political consequences) of endless austerity whilst at the same time tightening the screw to make sure it bites even deeper.

The reported 1% growth in the third quarter of this year was, as everybody knows and the Tories themselves predicted, largely the result of the Olympics (ticket sales, plus the boost for shops, hotels and restaurants) and what was lost in June being made up in the next two months.

Nor is the apparently surprising rise in employment a sign that the economy has turned around. It isn’t the employment level which is the key criterion, but rather the employment rate (i.e. the level divided by the population), and that has been largely flat over the last 3 years, which broadly fits the GDP data. In addition the fall in real wages indicates that, unlike in previous downturns, job retention has been traded against a drop in income.

A third point is that the rise in jobs has been overwhelmingly part-time or short-term, which may well reflect that employing 6 part-timers instead of 3 full-timers can save the employer some £1,650 a year – though perversely reducing tax receipts to the Treasury by that amount which could have been used for job creation.

In his over-eagerness for wish fulfilment, Cameron has overlooked the missing ingredient. It’s the level of demand, stupid! With a massive fiscal consolidation plus both public and private sectors deleveraging (i.e. unwinding their debts) fast at the same time, monetary policy – now taken to its utter limits by 0.5% base rate and £375bn of printed money) – cannot alone generate growth.

That is the reason why GDP remains at a staggering 13-14% (worth some £200bn in lost incomes) below what it would have been if growth had continued at its pre-recession rate of 2.5% a year.

The reality is shown by Ford’s closure of a century of vehicle production in Britain with the loss of 1,400 manufacturing jobs , announced on the very same day of Cameron’s rash prediction. The truth is the economy remains fundamentally fragile, with no sign at all of rising real incomes or any major shift towards investment and exports which at the real signs of a sustainable recovery.

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