David Cameron’s Red Lights

1st November 2014

The Prime Minister, David Cameron, has written a very unusual piece for The Guardian warning that "the red warning lights are once again flashing on the dashboard of the global economy." It is rare for any Prime Minister to leap ahead of the chancellor in order to try and change the direction of the economic debate and especially unusual for the PM to do so six months before an election. The article repays a close reading.

What, one wonders does he mean by this and why has he done it? The evidence he cites for his warning is in the conversations he has had with fellow leaders at the G20 in Australia – the downturn in the Eurozone, the slowdown in emerging markets, instability in the Middle East, the Ukraine and Ebola. He did not mention the other thing which worries the financial sector most – the capricious interventions by regulators in Europe and the United States.

One of the things about being Prime Minister, or indeed a chief executive or chairman, is it gives you a privileged vantage point from where to observe the world. Economic commentators at home have a tendency to be incredibly parochial, so it is quite possible that Mr Cameron has picked up some valuable early intelligence from his fellow leaders in Australia. The Bank of England, which enjoys a similar lookout post, trimmed its growth forecasts in last week’s inflation report from 3.1% next year to 2.8%, and from 2.8% to 2.6% in 2016. But for individuals, these reductions would be offset by a collapse in inflation, driven by commodity prices and technological innovation, and a modest recovery in earnings and productivity.

There are three possible explanations for Mr Cameron gesticulating at his red lights, which have so far been largely unremarked on by other independent observers. It is notable, for instance, that Xavier Rolet, chief executive of the London Stock Exchange, also chose last week to predict a recovery in large new issues and the LSE’s shares are now at record levels.

The first explanation could be that he has genuine intelligence, not just from the G20 but from the Treasury, that the strong British recovery is going into reverse. The public finance numbers have been disappointing, with the deficit running higher than last year. The Treasury could well take this as an early indicator that genuine, cash generative economic activity is on the slide. Flat income tax revenues, for example, could be an indication of job insecurity and a lack of pay rises and disappointing bonuses. The IPO market has lost some of its confidence and so has the London housing market. The Autumn Statement is next month and it is possible that we will all be taken by surprise by gloomy warnings from the chancellor and a slashing of forecasts by the Office for Budget Responsibility.

The second explanation is political. Three days before a critical by-election, the subliminal message of his piece could be that a vote for UKIP or indeed Ed Miliband would put the nascent recovery at risk. It would mean an end to deficit reduction, an elevation of businesses risks and tax rises. In that sense, Mr Cameron’s article is a dramatic foreshadowing of the Conservative general election strategy. He does not want a repeat of 1997, when he himself worked as a special advisor in the Treasury and voters were so confident about the economy they thought it was safe to dally with Labour.

The third explanation is a combination of the above. There is strong evidence that even in the best of times, when there is peace at home and abroad, the economy moves with the electoral cycle. As we move into 2015, irrespective of what is going on in the world economy, the rising and continued political uncertainty can only depress the animal spirits at home.