E Andrew Sentance On Britain’s Economic Edge

I took tea yesterday with British economic analyst Andrew Sentance, author of a new book called Rediscovering Growth: After the Crisis. In fact we drank decaf cappucino at the HQ of PricewaterhouseCooper, where he is senior economic advisor. PWC is located in a 3-yr old new building within shouting distance of The Shard, at More London Place, which is not even mentioned in my London A to Z guide.

This site summed up the new British growth areas Mr. Sentance writes about, a driver for recovery.

His book casts doubt about much current economic chatter, like the idea that only making things matters. Too much statistical weight is being given to goods exports (which are quicker to be tallied), and not enough to service exports.

Britain’s edge, he argues, is no longer in bashing metal or weaving cloth. Instead, the UK has an edge in services. Currently, British service exports account for a whopping 12% of GNP, triple the level of American service exports in US GNP, and much higher than service exports from other European centers. Britain, Mr Sentance says, has an advantage in services as a “small, open, competitive economy” (a SOCE) with significant “labor market flexibility”.

Another current shibboleth Mr. Sentance shoots down is the comparison of the latest economic crisis with that of the 1930s. In fact the Great Depression recovery was held back by a factor he doesn’t think will halt the current one: protectionism. It was a period when globalization was considered the enemy, whereas now it is the key to growth. A better pattern for resuming growth he cited is from the 1970s after the dollar-based fixed-exchange regime ended. (We are both old enough to remember that period.)

Of course it’s different this time. Mr. Sentance says that what economists learned from the 1970s is that the old Keynesian remedy of deficit spending doesn’t work for a SOCE whose output performance depends on exports.

Letting inflation run rampant (the error of the 1970s) is no longer considered a valid economic policy option, even among the former Keynesians. Crafting barriers to trade as in the 1930s is no longer even considered as a policy option. He also takes a negative view of the parallel currently being drawn with Japan’s “lost decade”, which he thinks overstates the risk of the reverse danger, deflation.

Au contraire: business confidence and investment depend on a perception that the authorities are in control against both risks.

Mr. Sentance warns too that expansion will not resume until a new economic generator of growth takes hold, and it will not be via “a manufacturing renaissance”. The trigger for growth may come perhaps in the information and communication area (where I hang out) or from energy efficiency spending and environmental breakthroughs. Expansion will resume, but it may take time. Low interest rates and eased lending alone will not be enough. Central banks have to gradually taper their monetary expansion for the health of their economies but with “no sudden lurch”.