A week in which the UK's high street looked to be on course for total collapse has raised fears that we could now be in the middle of a protracted, Japanese-style period of stagnation. Economists want George Osborne to change tack
There could be few better symbols of the fragile state of Britain's recession-scarred economy than the news that with HMV and Blockbuster joining the dismal roll call of retailers forced into administration, an extraordinary 1,400 shops on high streets up and down the country are now at risk of closure within less than a month.
Research by the Local Data Company suggests that the combined impact on the high street of these two latest victims, together with the recent collapse of electrical retailer Comet, shoe shop Stead and Simpson, and camera specialist Jessops, has been even heavier than during 2009, when the much-loved Woolworths closed the doors of its 807 stores for the last time.
Like Comet and Jessops, HMV and Blockbuster had both faced a formidable challenge to reinvent themselves as the relentless rise of online retailing rocked their respective industries. But the chronic weakness of consumer demand in Britain's flatlining economy has also been a key factor in driving so many well-known names to the wall. If none of the 1,400 stores is reoccupied, an extraordinary 19% of Britain's shop premises will stand empty.
These latest very visible scars on the fabric of economic life have appeared as the coalition faces rising pressure to get a grip on a slump that has now lasted five years: what ratings agency Moody's last week called a "lost half-decade", echoing the name given to Japan's long period of stagnation from the early 1990s.
Despite interest rates that have hovered around zero since the mid-1990s, and repeated rounds of quantitative easing, Japan has never achieved a sustained recovery.
If, as many City analysts expect, official figures reveal on Friday that the UK economy slipped into reverse in the final quarter of 2012, chancellor George Osborne will face fresh questions about whether the UK is heading for its own "lost decade".
A new report from left-leaning think-tank Compass, "Plan B+1", published 12 months after it first set out a blueprint for economic revival, calls for radical measures including increasing jobless benefits to boost the spending power of the poorest in society (who are more likely to spend what they receive); investing in green technologies; and reviewing every pound of government spending to assess its effectiveness in "promoting wellbeing, environmental sustainability and reducing inequality".
David Kern, chief economist at the British Chambers of Commerce, which represents many smaller firms, says he backs the chancellor's broad aim of tackling the deficit, but believes spending in some key areas could be increased without him losing credibility.
He says: "Our view has always been that what we need is a two-pronged strategy: not abandoning the overall fiscal plan, but adjusting it; continuing to do things that may be unpopular, like welfare reform, but taking action in all those various areas where, rather than just increasing demand, you improve the supply side of the economy."
That might mean, for example, improving the country's infrastructure. Peter Spencer, of forecasting group the Ernst and Young Item club, which publishes its quarterly health check of the economy today, agrees: "If they go for infrastructure – let's say £15bn, financed by borrowing – it certainly wouldn't cost them their AAA rating; and over time they would get it back in tax and reduced unemployment benefits."
The chancellor singles out Britain's cherished AAA rating as the measure of policy success, but all three of the big credit ratings agencies have warned the Treasury that the UK could be downgraded if growth continues to disappoint. City experts believe a negative GDP reading for the fourth quarter of 2012, potentially signalling the onset of a triple-dip recession, could be the trigger.
With little hope that Osborne will relax his grip on the finances, one area some economists have seized on as ripe for a rethink – and one which appears to appeal to the cornered chancellor – is Britain's monetary policy regime, the role of the Bank of England in guiding the economy. Mark Carney, the hotshot Canadian hired by Osborne to take over from Sir Mervyn King this summer, sparked a flurry of excitement in policy circles before Christmas when he mused that it might be time to ditch the inflation-targeting regime that has evolved since the 1990s.
Carney suggested that when, as now, interest rates are near zero and growth is weak, it might be right for central banks to take more radical action. They could, for example, copy the Federal Reserve's approach of "forward guidance," announcing that it plans to keep interest rates low for a long time, at least until mid-2015.
If that should fail, he added, the inflation target could be ditched in favour of using a measure of nominal GDP – the total output from the economy, measured in pounds, without adjusting for inflation. Proponents of a nominal GDP target argue that at times when growth is very low, a bit of inflation should be less of a concern than the corrosive impact on the economy of a long period of stagnation.
Aiming at a nominal GDP target could, they claim, force the Bank to shrug off its concerns about inflation and go all out to kick-start growth. And during the boom years, when inflation was low but growth strong, it might have forced policymakers to push up interest rates and prevent a bubble inflating.
Spencer at the Item club backs a change of regime: "It's the sum of inflation and growth, and it would put them both on a par. It's obvious that in the present circumstances it would give the Bank latitude to allow a temporary inflation overshoot."
However, even within its current job description of keeping inflation close to 2%, the Bank has "aimed off" its target during the crisis, allowing inflation to remain high, because, as King has repeatedly argued, bringing it back to 2% more rapidly would have entailed an even deeper recession and higher unemployment.
Any decision about changing the inflation target would ultimately rest with the chancellor. But David Blanchflower, the former monetary policy committee member who has been highly critical of the Bank's approach, says that even if Carney arrives full of enthusiasm for embracing a new system, and wins over Whitehall, he may be stymied by his eight colleagues on the MPC. "I say if you're going to hire the guy, fire the other eight, and let him do the job," he says, calling for a thorough clearout in Threadneedle Street.
But not all advocates of a fresh start for the UK economy believe a shift in monetary policy should be the main tool. Adam Posen, another outspoken US academic with a stint on the MPC under his belt – he left last year – is cautious about junking the inflation target, despite calling for the Bank to take more aggressive action, such as lending directly to cash-starved businesses.
Posen, who is now president of the Peterson Institute for International Economics, calls a money GDP target of the sort Carney has mooted "a bit of a gimmick", warning that it would be harder to explain to the public and would immediately be seen by financial markets as a decision to let inflation rip.
And if wages remain stagnant in the face of rising prices, as has been the case over the past three years or so, higher inflation can simply depress consumer spending rather than "inflating away" households' debt burden, as happened in the 1970s, when wages rose in step with rocketing prices.
Kern of the BCC says more quantitative easing would be unlikely to provide much of a boost. "Quantitative easing was never a particularly powerful tool to stimulate growth," he says. "Any good that more QE could do in terms of a lower pound and more exports would be more than nullified by the damage it would do to domestic demand."
Instead of fiddling with the monetary policy regime, Posen would like to see Osborne relax his grip on the nation's purse strings and abandon his obsession with austerity: "When you've implemented everything, and it's had the opposite effect, and it's been a bad effect, you have an ethical and public responsibility to change policy."
A climbdown would be humiliating for a chancellor who has pinned his reputation on unstinting austerity, but the weak recovery, which has repeatedly blown a hole in the Treasury's fiscal plans, has already resulted in Osborne having to extend the planned period of austerity for three years longer than he had hoped, to 2017-18.
"It was embarrassing when the British empire had to withdraw from places such as Suez; it was embarrassing when the Bank of England had to withdraw from the European exchange rate mechanism; but both those things were for the best in the end," Posen says.
However, despite the boarded-up shops, he does not believe the UK economy has lost the ability to pay its way in the world: "Walking around the UK – and I don't just mean London – doesn't feel like the early 1980s, let along the late 1970s."