Turkey and Europe. Too soon for Turkish delight

The chancellor's once solid reputation is increasingly at risk

IF GORDON BROWN is the anointed successor to Tony Blair, then he owes it principally to his prowess as chancellor of the exchequer. Labour won the May general election by campaigning on its economic record. Tony Blair lauded his colleague as probably the most successful chancellor in 100 years. Mr Brown, who doesn't do modesty, said that he was presiding over the longest period of sustained economic growth in 300 years.

Such claims were a hostage to fortune. The worry for the chancellor is that his record will deteriorate as he waits impatiently for Mr Blair to step down. Mr Brown said in his conference speech on September 26th that he wanted to revitalise New Labour, but that lofty ambition, whatever it means, will be harder to realise if the economy starts to founder.

Already, revisions to the national accounts have shown that GDP growth since the middle of 2004 has been weaker than thought at the election. Official figures released on September 28th revealed that the economy grew by 1.5% in the year to the second quarter of 2005, the slowest for 12 years. Quarter-on-quarter, GDP growth has been below trend for the past year and manufacturing slid into recession in the first half of 2005.

With little sign of an imminent recovery, Mr Brown has had to downgrade his growth forecast for this year. In his March budget, the chancellor was able to trounce his critics by reporting that the economy had expanded by more than 3% in 2004 - bang in line with his forecast a year earlier. But his hopes for a repeat performance in 2005 have been dashed. Far from growing by 3-3.5%, as Mr Brown predicted in March, the economy is likely to grow by about 2%, as he in effect admitted in America on the eve of Labour's conference.

Chancellors take credit for the good times but blame other people when things go wrong. No exception, Mr Brown has a culprit to finger. The recent oil-price shock, he says, is as big as that of the 1970s, which triggered a global recession.

The excuse is pretty lame. For one thing, the doubling of oil prices since the start of 2004 bears little resemblance to the quadrupling that occurred in the final three months of 1973. For another, the real oil price, while higher now for Americans than its peak in the early 1970s, remains lower for the British economy (see chart on next page). Furthermore, Britain was then a big oil importer, whereas it is now self-sufficient because of North Sea production. These days the economy also uses much less oil per unit of GDP, to such an extent that it has become the least oil-intensive among the G7 countries.

As a result an oil-price shock affects Britain less than other developed countries. According to Ray Barrell of the National Institute of Economic and Social Research, a rise in oil prices cuts GDP growth by half as much as it cuts the euro area's and by a third as much as it reduces America's. He estimates that only about a quarter of Britain's slowdown from growth of 3.2% in 2004 to projected growth of 2% in 2005 can be pinned on to higher oil prices.

The unpalatable truth is that the slowdown has been predominantly home-grown. Unfortunately for Mr Brown, it represents the payback for the long period of growth on his watch. Since he became chancellor in 1997, a surging housing market, which he acknowledged this week became a bubble, has underpinned consumer spending which in turn has sustained economic growth. Households ran down their savings and ran up debt, which has risen to a record 150% of their disposable income.

But now the housing-market boom is over. House prices rose by just 1.8% in the year to September, the lowest increase since May 1996, according to the Nationwide building society. Consumers are weighed down by the burden of servicing their debt. The mounting pressure on household budgets has taken its toll. People have rediscovered the habit of saving. The saving ratio has jumped from 4.1% of disposable income in the last quarter of 2004 to 5.0% in the second quarter of 2005.

As a result, consumers are no longer bolstering the economy. After growing by 0.9% a quarter since Labour won power in 1997, household spending has lost momentum this year. In the first three months of 2005, it increased by just 0.1%, and in the second quarter by 0.4%.

The worry for Mr Brown is that the economic weakness will persist. Over the past few years, the public sector together with consumers have been the main engines of growth. But the public-spending boom ends next April. With consumers likely to remain thrifty, this means that GDP growth will have to rely more upon business investment and exports. However, firms are likely to be cautious in making investments and exporters will have to contend with low growth in the euro area, their main customer.

A more sluggish economy will exacerbate Mr Brown's financial difficulties. Whatever his record in forecasting growth, the chancellor has been persistently over-optimistic in his budgetary predictions over the past four years. In March he said that the government would have to borrow £32 billion, equivalent to 2.6% of GDP, in 2005-06. Once again, his forecast looks too sanguine as a slowing economy and a shift to exports, which generate less tax, drive up the deficit.

Mr Brown has in many ways been a lucky chancellor. He was fortunate to have inherited from the Conservatives a healthy economy and public finances that were rapidly improving. But his luck ran out some time ago on the budget and now it appears to have done so on the economy, too. If he is now impatient to become leader, it may be because he fears what another full term at the Treasury will do to his reputation as chancellor.