David Cameron is wrong in making the assumption that the economy will naturally right itself – it won't
New year – but when it comes to the economy, the same old problems linger on. Take two pieces of news from yesterday. First, Tesco shares plunged 16% after it confessed to a 2.3% drop in sales over Christmas, usually the busiest time of the year for retailers. Not all of this fall can be pinned on the woes of the wider British economy. As new-boy boss Philip Clarke admitted yesterday, the previously all-conquering high street giant was probably due a bit of a pause: "We've run hot too long". But put that next to grim sales at Mothercare, Halfords and Argos, and throw in the British Retail Consortium's description of 2011 as a "pretty miserable year" for the high street, and a bigger picture comes into focus: the Great British shopper may not be on strike exactly, but he or she is certainly on buy-to-rule.
Blame it on the squeeze in wages, rising unemployment or 5% inflation – or a mix of all three – but the previously indefatigable consumer is trading down and buying less. If the BRC calculates a 2.2% rise in total sales over 2011, and inflation is around 5%, the real value of shop sales last year actually shrank by 3%.
A drop in retail sales is not in itself such a terrible thing. For one, some of the factors that depressed shop sales last year are likely to fade into the background. Inflation is likely to be much more moderate this year, with the effects of last January's VAT hike now dropping out of the figures. More energy companies are likely to follow EDF's lead in announcing a drop in tariffs. Most important of all, the UK needs to go through a rebalancing of its economy: away from borrowing and spending, to saving and producing. It's not only economists who think that: the government does too. George Osborne introduced his last budget as one to fuel the "march of the makers". David Cameron and Nick Clegg have devoted whole speeches to the necessity of rebalancing the economy. And yet, nearly two years into this government, there is precious little sign of that happening. Yesterday the Office for National Statistics revealed that industrial production fell 0.6% last November, as manufacturing continued its year-long slide. Both sectors are substantially smaller than they were in 2008. It is more than likely that industrial production fell throughout the last three months of 2011. Since industry still accounts for about 15% of Britain's GDP, that makes it more than likely that the fourth-quarter GDP figures (due out in a fortnight) are going to be very disappointing indeed.
So the planned manufacturing renaissance remains even more elusive than it was in the week Lehman Brothers collapsed. Retail sales are shrinking. The government has embarked on the biggest cuts programme in living memory. As for the final component of GDP, net exports, the gap between what the UK buys from the rest of the world and what it sells abroad is the biggest it has been since 1955. Not all of these problems were created by the coalition: Britain's lack of exporting power has been evident since the late 80s. But the accusation that must be put to Mr Cameron is that he has followed economic policies that have left Britain peculiarly exposed during this global crisis. Moreover, he has promised something that will not happen: namely an industrial revival. The result is that more businesses will go belly-up than need have been the case, and that unemployment will remain a lot higher for a lot longer. Both errors can be traced to a big mistake in the prime minister's thinking: the assumption that the economy will naturally right itself. He believed that the private sector was more robust than it was and that rebalancing could simply be left to market mechanisms. He was badly wrong.
A different way of rebalancing could be seen across the Atlantic this week, where Barack Obama proposed big tax breaks for manufacturers employing workers in America and tax hikes for others relocating jobs abroad. Rebalancing an economy and securing jobs requires active government. That is a lesson the US president has learned too late; it has yet to dawn on the British prime minister.