'Green shoots' of UK recovery: fact or mirage?

The comment by a senior member of the UK administration that she could see a few "green shoots" of economic recovery has raised a storm, with the opposition united in condemning the statement. But some economists feel there may be a grain of truth in what Baroness Vadera, a colleague of Lord Mandelson in the Business Department and a trusted aide of Prime Minister Gordon Brown, said.

Asked by a TV channel on Thursday when she believed the UK could expect to see "green shoots", Lady Vadera replied, "I am seeing a few green shoots, but it's a little bit too early to say exactly how they'd grow."

The phrase reminded commentators of a similar claim by in 1991 by Norman Lamont, the former Chancellor, to have detected "the green shoots of economic spring appearing once again". His statement was regarded as premature and lambasted by critics. Eighteen years later, the Tories have got their chance of revenge.

Shadow business secretary said: "Shriti Vadera's comments go to show how out of touch and insensitive Gordon Brown's ministers are," while Vince Cable, the Liberal Democrat Treasury spokesman, said: "Baroness Vadera is clearly living in a parallel universe if she thinks the economy is beginning to recover."

The comment came even as Barclays announced that it was to cut 2100 UK jobs, Jaguar Land Rover said it was losing 450 staff, and the music chain Zavvi announced that it would close a further 18 stores, with the loss of 353 jobs. However, 10 Downing Street defended Lady Vadera, saying that some companies were "expanding their workforces".
Business secretary Lord Mandelson said critics were making a mountain out of a molehill. He said her comments were "a very far cry from a set piece, strategic speech made to the Tory party conference by Norman Lamont all those years ago".

He explained that her remarks came just after she had received information about a bond issue by a large, but unnamed, British company. He said the company had been struggling to get a bond issue away for several months.

Lady Vadera is understood to get daily updates on the bond markets and considers it an important signal that measures by European governments to ease the credit crisis are beginning to work. However, she was said by friends to regret using the "green shoots" phrase and the row it caused.

The bond market has begun to open up for bigger borrowers, and there is also good news on jobs from Morrisons and Tesco. The comment was probably prompted by the news of a 500-million euro (£450 million) bond issue by National Grid, the latest in a string of issues that could make January a record month for corporate bonds.

Debt bankers agreed there were "tiny green shoots" of optimism, saying investor appetite for bonds showed a belief that the economy will pick up. However, experts caution against irrational optimism, warning that the heavy issuance of bonds comes at a cost for companies, who are having to pay higher rates of interest to attract investors.

So far 20.6 billion euros (£18.6 billion) of bonds have been issued by European companies in the last week and analysts are predicting that the total will exceed the previous 25 billion euros monthly record set in January 2003. In an apparent contradiction of Lord Mandelson's statement, National Grid said the utility has had few problems accessing funds from the bond markets.

A spokesman for the company said it had raised more than £4 billion from the bond markets in the last 12 months and had continued that programme into 2009, with three new bond issues, all of which are to fund its investment plans.

Several other large European companies have managed to raise considerable sums in the bond market in recent days, including Severn Trent, Orange-owner France Telecom, and energy group E.ON.

Companies have been rushing to raise money from the capital markets because balance sheets are tight, and banks have been reluctant to lend. Investors have been more than willing to mop up the supply of new bond issues from blue-chip companies, but at the right price. The interest paid on the bonds is considerably higher than before the credit crisis.

Sir John Gieve, the deputy governor of the Bank of England, warned that further interest rate cuts and fiscal measures would be required to tackle the recession, and suggested that the government's economic forecasts were unrealistic.

Speaking in Manchester this morning, he said that while it was possible to overdo the degree of policy support offered during a downturn, the risk is that the current situation could get worse. "Therefore, in setting policy, the authorities both here and overseas need to consider whether further action on interest rates, or other monetary measures, or fiscal action is required," he said.
Sir John predicted another steep fall in gross domestic product in the first quarter of this year, following a decline in the final three months of 2008. "Further declines in output, if not at the same pace, are likely beyond then," he said.

Figures due to be published next week will provide the first official confirmation that Britain is in its first recession since the early 1990s. The Office for National Statistics is expected to reveal a sharp contraction in gross domestic product (GDP) in the final quarter of 2008, following a 0.6 per cent fall in the third. Figures published earlier in the week show that the UK's trade deficit widened to a record £8.3 billion in October as total exports fell 6 per cent.