Buck up, Britain! Enough of the wailing over high inflation and whining about soggy growth. Repeat after me: I am not an emerging market. I am not a developing country. I am not led by a lettuce. Or just listen to chancellor Jeremy Hunt, who recently rejected the “declinist narrative” going around. Careful, he says, or the doom and gloom could become self-fulfilling.
Are bad vibes really holding back Britain’s economy? Ridicule is one response. Output per worker was almost 50 per cent higher in America than in Britain in 2021 while UK consumer prices rose by 8 per cent over the year to June, a higher rate than in the eurozone, Japan or America. Fitch, a rating agency, expects debt interest to eat up more than 10 per cent of government revenue in 2023. Perhaps some positive thinking could heal the pain?
The more serious riposte is that negative narratives reflect harsh realities. According to a survey by EY published in June, over 17 per cent of investors expected the UK’s attractiveness to decline over the next three years, compared with 4 per cent a decade ago. They cite real factors including an increased regulatory burden, higher costs, a reduction in market size and political instability. Those sounds less like a leftwing plot to talk down the economy than the tedious consequences of government policy. It’s hard to stay upbeat about the pace of economic growth when the Bank of England is actively trying to slow it down.
It is possible both that there is a bit too much despondency surrounding the British economy, and that this melancholy could affect real outcomes. Economists have certainly theorised as much. One idea is that because people do not have crystal balls, they struggle to calculate future returns precisely. That means decisions require judgments from the gut, and “animal spirits” can influence whether investments happen.
Another option, pushed by the economist Robert Shiller, is that our behaviour is strongly affected by narratives, including viral stories or jokes. Perhaps the image of the UK’s former prime minister fighting to outlast a decaying vegetable stuck in investors’ minds and put them off British assets, raising the government’s borrowing costs, crimping investment and holding back growth. Crises of consumer confidence could matter too, if scary stories about the economy cause them to save rather than spend.
What evidence is there that trash talk matters? Ideally you would look at whether changes in mood predicted changes in the real economy. And research does suggest that consumer confidence predicts higher inflation and lower unemployment in future, which is at least consistent with the idea that feelings have real-world effects. But it is difficult to isolate shifts in mood from other things. Are people feeling gloomier about the British economy holding everything else equal? Or are they responding to information about a darker future? Or are they merely feeling more uncertain about tomorrow? If, say, the outlook for interest rates became a lot less predictable, some precautionary saving might make sense.
In a recent working paper, Joel Flynn of Yale University and Karthik Sastry of Princeton University try to isolate the effect of pure optimism on hiring decisions in America, and find evidence that it is real. They analyse the wording of US end-of-year reports to measure narratives, and split firms into the optimistic and the pessimistic. Optimistic companies increased their workforce by about 3.6 percentage points more than pessimistic ones over the following year. They also found that optimistic firms did not go on to be any more productive than pessimistic ones, and in fact tended to be less profitable in future. Company hiring is influenced by both positive and negative stories, not just good news.
When it comes to Britain, there is little reason to think that its companies would be any more level-headed than American ones. But there is some evidence of recent excessive gloom. Over 2022, consumer confidence slumped to a lower point than seen either during the pandemic or the financial crisis of 2007-09. Even before the rumpus associated with Liz Truss’s botched growth plan, the OBR was predicting a year-long recession. By the end of the year most forecasters were predicting a downturn.
But the slump still hasn’t arrived. Between March and May there were 1.3 unemployed people for each job vacancy. Retail sales have held up. It is probably right to gripe that there was too much negativity about Britain’s economic outlook. But so far at least, the economy has escaped the tyranny of its own low expectations.
soumaya.keynes@ft.com
Source: Economy - ft.com
