Bank of Baroda withdraws Auction of Sunny Deol's Bungalow

 

Economics Essay 44: Economic Recovery from Shocks

Discuss the extent to which economies are likely to recover quickly from negative demand side shocks in reality.  

The speed and extent of economic recovery from negative demand-side shocks in reality can vary depending on the following factors:

1. Magnitude and Duration of the Shock: The severity and duration of the negative demand-side shock can significantly impact the recovery. For instance, the global financial crisis that started in 2008 originated in the United States with the collapse of the subprime mortgage market. The magnitude of the shock and its ripple effects led to a prolonged and challenging recovery for many economies worldwide. Countries heavily reliant on exports and with large financial sectors, such as Ireland and Spain, faced protracted recessions and slow recoveries. In contrast, economies with strong policy responses, like Germany, recovered relatively quickly due to their diversified industrial base and robust fiscal stimulus measures.

2. Economic Structure and Diversity: The structure and diversity of an economy can influence its ability to recover from a demand-side shock. For example, the Eurozone debt crisis affected countries such as Greece, Portugal, and Spain. These economies faced high levels of debt, banking sector weaknesses, and structural rigidities, which hindered their recovery. The need for austerity measures and structural reforms to address underlying imbalances slowed down their recovery processes, resulting in extended periods of economic contraction and high unemployment rates. In contrast, countries with more diversified economies and robust policy responses, such as Germany, demonstrated a faster recovery.

3. International Factors: Economic recovery can be influenced by global factors such as trade relationships, exchange rates, and international financial conditions. The Asian financial crisis in 1997 provides an example of the varying speed of recovery following a negative demand shock. South Korea implemented timely and comprehensive policy responses, including structural reforms, bank recapitalization, and international financial assistance. As a result, it experienced a relatively quick recovery. In contrast, countries like Indonesia faced more significant challenges due to political instability and delayed policy actions, leading to a more protracted recovery period.

4. Policy Response: The effectiveness and timeliness of policy responses play a crucial role in shaping the speed of recovery. The COVID-19 pandemic serves as a recent example of a negative demand-side shock. Economies like New Zealand and South Korea demonstrated quicker recoveries due to their ability to control the virus and restore consumer confidence through targeted fiscal measures and support for affected sectors. In contrast, countries heavily dependent on tourism, such as Thailand and Spain, faced significant challenges due to the sharp decline in international travel.

These examples highlight the diverse outcomes and factors that influence the speed and extent of recovery from negative demand-side shocks. The severity of the shock, policy responses, structural factors, and external conditions all play crucial roles in shaping the recovery trajectory of economies.

For Middle Class Indians: What to do if you can't repay your EMI Loans - Please share widely

 

Loan Recovery in India: Why the Middle Classes still support BJP?

 

Zombie companies walk among us

Tim Harford in The Financial Times


For vampires, the weakness is garlic. For werewolves, it’s a silver bullet. And for zombies? Perhaps a rise in interest rates will do the trick. 

Economists have worried about “zombie companies” for decades. Timothy Taylor, editor of the Journal of Economic Perspectives, has followed a trail of references back to 1989, noting sightings of these zombies in Japan from the 1990s, and more recently in China. The fundamental concern is that there are companies which should be dead, yet continue to lumber on, ruining things for everyone. 

It’s a vivid metaphor — perhaps a little too vivid — and it is likely to be tested over the months and years to come if, as almost everyone expects, central banks continue to raise interest rates back to what veterans might describe as “normal”. 

Claudio Borio of the Bank for International Settlements recently gave a speech in which he worried about the tendency of low interest rates to sustain zombie companies. Mr Borio has consistently been concerned about the distorting effects of low interest rates, but the zombie element of his argument adds a new twist.

Researchers at both the BIS and the OECD, the club of wealthy nations, have found evidence that low interest rates seem conducive to the existence of zombies, which they define as older companies that don’t make enough money to service their debts. As interest rates have fallen around the world, such zombies have become more prevalent and have also shown more endurance. 

On average, across the US, Japan, Australia and western Europe, the proportion of firms that are zombies has risen fivefold since 1987, from 2 to 10 per cent. The zombies walk among us. 

Why should we worry? One obvious answer is that zombies absorb resources. If a zombie retailer occupies a space on the high street, that makes it harder and more expensive for a start-up or a successful competitor to move in. The same goes for any resource from advertising space to electricity, and of course it goes for staff, too. 

We would usually expect a thriving company to be able to outbid the walking dead for anything necessary, from a finance director to a unit in an industrial estate. But the status quo always has a certain power, and in some cases, the zombie might be at an unfair advantage. 

Consider a zombie bank, propped up by a government guarantee but basically insolvent. Gambling on resurrection, it tries to expand by offering high rates to depositors and cheap loans to creditors. In the late 1980s, Joseph Stiglitz — later to win a Nobel memorial prize in economics — proposed a “Gresham’s law” of savings-and-loan associations based on this tendency: bad associations crowd out good ones. 

More recently, the collapse of Carillion, a large British outsourcing and construction firm, showed a similar dynamic. The more Carillion struggled, the more desperate it became to win new business — which meant aggressive bids in competitive auctions, dooming Carillion while starving competitors of business. 

Having written an entire book about the importance of failure, I am naturally sympathetic to Mr Borio’s argument. Modern economies have a low failure rate — probably too low. Still, one should not be too cavalier about this point. To ordinary ears, bankruptcy sounds unambiguously bad. If you spend too much time thinking about zombie firms and economic dynamism, bankruptcy starts to sound unambiguously good. 

Cut down those zombies and let highly productive new firms grow in the rich soil, fertilised by those zombie corpses, sounds like — forgive the play on words — a no-brainer. But should we really be so pleased that so many of the UK’s coal mines, or the auto suppliers of Detroit, have been successfully killed off? If nothing has replaced them, there is nothing to celebrate. 

One of the lessons of recent economic research by economists David Autor, David Dorn and Gordon Hanson has been that productive new firms do not necessarily spring up as we might have hoped. Mr Autor and his colleagues have, in a series of influential papers, tracked local areas subject to the sudden shock of competition from imported Chinese products. Their conclusion: recovery is neither quick nor automatic. 

Nor is it always easy for laid-off workers to stroll into fresh jobs: if you have worked for several years stitching soft toys, then the obvious next step when the toy factory lays you off is to start stitching shirts or trousers instead. Unfortunately, that is also the obvious next move for the importers, or the robots. 

We can make a long list of policies that might help new productive firms to get started and expand: education, infrastructure, flexible regulations, small-business finance and so on. There is some evidence in favour of these policies, but no checklist can guarantee results. 

Still, that is where to focus our attention as the zombies start to expire. The easier it is to start a new idea, the more hard-nosed we can be about killing off the old ones. It is necessary that the zombies must die, but that cannot be where the story ends.

Don’t blame China for these global economic jitters

In truth the west failed to learn from the 2008 crash. Any economic ‘recovery’ was built on asset bubbles

Ha Joon Chang in The Guardian


 

‘There has never been a real recovery in North America and western Europe since 2008.’ Photograph: Kai Pfaffenbach/Reuters


The US stock market has just had the worst start to a year in its history. At the same time, European and Japanese stock markets have lost around 10% and 15% of their values respectively; the Chinese stock market has resumed its headlong dash downward; and the oil price has fallen to the lowest level in 12 years, reflecting (and anticipating) worldwide economic slowdown.

According to the dominant economic narrative of recent times, 2016 was the year when the world economy would recover fully from the 2008 crash. The US would lead this recovery by generating growth and jobs via fiscal conservatism and pro-business policies. Reflecting the economy’s robust growth, the US stock market reached new heights in 2015, although disrupted by the mess in the Chinese stock market over the summer. By last October, US unemployment had fallen from the post-crisis peak of 10% to 5%, bringing it back close to the pre-crisis low. In a show of confidence, last month the US Federal Reserve finally raised its interest rate for the first time in nine years.

Not far behind the US, the story goes, have been Britain and Ireland. Hit harder than the US by the financial crisis, they have, however, recovered handsomely because they kept their nerve and stuck to the right, if unpopular, policies. Spending cuts, focused on wasteful welfare spending, accelerated job creation by making it more difficult for people to live off the taxpayer. They sensibly didn’t give in to the banker-bashers and chose not to over-regulate the financial sector.

Even the continental European economies have been finally picking up, it was said, having accepted the need for fiscal discipline, labour market reform and cutting business regulations. The world – at least the rich world – was finally set for a full recovery. So what has gone wrong?

Those who put forward the narrative are now trying to blame China in advance for the coming economic woes. George Osborne has been at the forefront, warning this month of a “dangerous cocktail of new threats” in which the devaluation of the Chinese currency and the fall in oil prices (both in large part due to China’s economic slowdown) figured most prominently. If our recovery was to be blown off course, he implied, it would be because China had mismanaged its economy.

China is, of course, an important factor in the global economy. Only 2.5% of the world economy in 1978, on the eve of its economic reform, it now accounts for around 13%. However, its importance should not be exaggerated. As of 2014, the US (22.5%) the eurozone (17%) and Japan (7%) together accounted for nearly half of the world economy. The rich world vastly overshadows China. Unless you are a developing economy whose export basket is mainly made up of primary commodities destined for China, you cannot blame your economic ills on its slowdown.

The truth is that there has never been a real recovery from the 2008 crisis in North America and western Europe. According to the IMF, at the end of 2015, inflation-adjusted income per head (in national currency) was lower than the pre-crisis peak in 11 out of 20 of those countries. In five (Austria, Iceland, Ireland, Switzerland and the UK), it was only just higher – by between 0.05% (Austria) and 0.3% (Ireland). Only in four countries – Germany, Canada, the US and Sweden – was per-capita income materially higher than the pre-crisis peak.

Even in Germany, the best performing of those four countries, per capita income growth rate was just 0.8% a year between its last peak (2008) and 2015. The US growth rate, at 0.4% per year, was half that. Compare that with the 1% annual growth rate that Japan notched up during its so-called “lost two decades” between 1990 and 2010.

To make things worse, much of the recovery has been driven by asset market bubbles, blown up by the injection of cash into the financial market through quantitative easing. These asset bubbles have been most dramatic in the US and UK. They were already at an unprecedented level in 2013 and 2014, but scaled new heights in 2015. The US stock market reached the highest ever level in May 2015 and, after the dip over the summer, more or less came back to that level in December. Having come down by nearly a quarter from its April 2015 peak, Britain’s stock market is currently not quite so inflated, but the UK has another bubble to reckon with, in the housing market, where prices are 7% higher than the pre-crisis peak of 2007.

Thus seen, the main causes of the current economic turmoil lie firmly in the rich nations – especially in the finance-driven US and UK. Having refused to fundamentally restructure their economies after 2008, the only way they could generate any sort of recovery was with another set of asset bubbles. Their governments and financial sectors talked up anaemic recovery as an impressive comeback, propagating the myth that huge bubbles are a measure of economic health.

Whether or not the recent market turmoil leads to a protracted slide or a violent crash, it is proof that we have wasted the past seven years propping up a bankrupt economic model. Before things get any worse, we need to replace it with one in which the financial sector is made less complex and more patient, investment in the real economy is encouraged by fiscal and technological incentives, and measures are brought in to reduce inequality so that demand can be maintained without creating more debts.

None of these will be easy to implement, but we know what the alternative is – a permanent state of low growth, instability, and depressed living standards for the vast majority.

Germany faces impossible choice as Greek, Spanish and Italian austerity revolt spreads

Ambrose Evans-Pritchard in The Telegraph

The political centre across southern Europe is disintegrating. Establishment parties of centre-left and centre-right - La Casta, as they say in Spain - have successively immolated themselves enforcing EMU debt-deflation.

Spain's neo-Bolivarian Podemos party refuses to fade. It has endured crippling internal rifts. It has shrugged off hostile press coverage over financial ties to Venezuela. Nothing sticks.

The insurrectionists who came from nowhere last year - with Trotskyist roots and more radical views than those of Syriza in Greece - are pulling further ahead in the polls. The latest Metroscopia survey gave Podemos 28pc. The ruling conservatives have dropped to 21pc.

The once-great PSOE - Spanish Workers Socialist Party - has fallen to 18pc and risks fading away like the Dutch Labour Party, or the French Socialists, or Greece's Pasok. You can defend EMU policies, or you can defend your political base, but you cannot do both.

As matters stand, Podemos is on track to win the Spanish elections in November on a platform calling for the cancellation of "unjust debt", a reversal of labour reforms, public control over energy, the banks, and the commanding heights of the economy, and withdrawal from Nato. 

Europe's policy elites can rail angrily at the folly of these plans if they wish, but they must answer why ex-Trotskyists threatening to dismantle market capitalism are taking a major EMU state by storm. It is what happens when 5.46m people lack jobs, when 2m households still have no earned income, and when youth unemployment is still running at 51.4pc, and home prices are down 42pc, six years into a depression.

It is pointless protesting that Spain's economy is turning the corner, a contested claim in any case. There comes a point when a society breaks and stops believing anything its leaders say.

The EU elites themselves have run their currency experiment into the ground by imposing synchronized monetary, fiscal, and banking contraction on the southern half of EMU, in defiance of known economic science and the lessons of the 1930s. It is they who pushed the eurozone into deflation, and thereby pushed the debtor states into accelerating compound-interest traps.

It is they who deployed the EMU policy machinery to uphold the interest of creditors, refusing to acknowledge that the root cause of Europe's crisis was a flood excess capital flows into vulnerable economies. It is they who prevented a US-style recovery from the financial crisis, and they should not be surprised that such historic errors are coming back to haunt.

The revolt in Italy has different contours but is just as dangerous for Brussels. Italians may not wish to leave the euro but political consent for the project but broken down. All three opposition parties are now anti-euro in one way or another. Beppe Grillo's Five Star movement - with 108 seats in parliament - is openly calling for a return to the lira.

Mr Grillo proclaims that Syriza is carrying the torch for all the long-suffering peoples of southern Europe, as it is in a sense.

"What’s happening to Greece today, will be happening to Italy tomorrow. Sooner or later, default is coming," he said.

Premier Matteo Renzi staked everthing on a recovery that has yet to happen. He is running out of political time. Deflation is overwhelming the fiscal gains from austerity. Italy's public debt has jumped from 116pc to 133pc of GDP in three years. The youth jobless rate is 44pc and still rising. Italian GDP has fallen 10pc in six years, and by 15pc in the Mezzogiorno. Italy's industrial production has dropped back to the levels of 1980.

The leaders of Spain and Italy know that their own populists at home will seize on any concessions to Syriza over austerity or debt relief as proof that Brussels yields only to defiance. They have a very strong incentive to make Greece suffer, even if it means a cataclysmic rupture and a Greek ejection from the euro.

Yet to act on this political impulse risks destroying the European Project. Europe's Left would nurture a black legend for a hundred years if the first radical socialist government of modern times was crushed and forced into bankruptcy by Frankfurt bankers - acting at the legal boundaries of their authority, or beyond - choosing to switch off liquidity support for the Greek financial system.

It would throw the Balkans into turmoil and probably shatter the security structure of the Eastern Mediterranean. It is easy to imagine a chain of events where an embittered Greece pulled out of Nato and turned to Russia, paralysing EU foreign policy in a self-feeding cycle of animosity that would ultimately force Greece out of the union altogether.

The charisma of the EU - using the Greek meaning - would drain away if such traumatic events were allowed to unfold, and all because a country of 11m people wanted to cut its primary budget surplus to 1.5pc from 4.5pc of GDP and shake a discredited Troika off its back, for that is what it comes down to.

One is tempted to cite Jacques Delors' famous comment that "Europe is like a riding bicycle: you stop pedalling and you fall off" but that hardly captures the drama of what amounts to civil war in a union built on a self-conscious ideology of solidarity.

"The euro is fragile. It is like a house of cards. If you pull away the Greek card, they all come down,” warned Greece's finance minister Yanis Varoufakis.

“Do we really want Europe to break apart? Anybody who is tempted to think it possible to amputate Greece strategically from Europe should be careful. It is very dangerous. Who would be hit after us? Portugal?" he said.

George Osborne clearly agrees. The worries have been serious enough to prompt a one-hour Cobra security meeting. "The risks of a miscalculation or a misstep leading to a very bad outcome are growing,” said the Chancellor.

Currency guru Barry Eichengreen - the world's leading expert on the collapse of the Gold Standard in 1931 - thinks Grexit might be impossible to control. "It would be Lehman Brothers squared,” he said.

This is not the view in Germany, at least not yet. The IW and ZEW institutes both argue that Europe can safely withstand contagion now that it has a rescue machinery and banking union in place, and must not give in to "blackmail".

Such is the 'moral hazard' view of the world, the reflex that led to the Lehman collapse in 2008. "If we knew then what we know now, we wouldn't have done it," the then-US treasury secretary Tim Geithner told EMU leaders in early 2011, the first time they were tempted to eject Greece.

The fond hope is that the European Central Bank can and will smooth over any turbulence in Portugal, Italy and Spain by mopping up their bonds, now that quantitative easing is on the way. Yet the losses suffered from a Greek default would surely ignite a political firestorm in Germany.

Bild Zeitung devoted two pages this morning to warnings that Grexit would cost Germany €63bn, or much more once the Bundesbank's Target2 payments though the ECB system are included. The unpleasant discovery that Germany's Target2 exposure can in fact go up in smoke - despite long assurances that this could never happen - might make it untenable to continue such support.

It is unfair to pick on Portugal but its public and private debts are 380pc of GDP - the highest in Europe and higher than those of Greece - making is acutely vulnerable to toxic effects of deflation on debt dynamics.

Portugal's net international investment position (NIIP) - the best underlying indicator of solvency - has reached minus 112pc of GDP. Public debt has jumped from 111pc to 125pc of GDP in three years. The fiscal deficit is still 5pc. The country's ranking in global competitiveness is close to that of Greece.

"The situation in Portugal is very different," says Paulo Portas, the deputy premier. Sadly it is not. Once you violate the sanctity of monetary union and reduce EMU to a fixed-exchange system, the illusion that Portugal is out of the woods may not last long. Markets will test it.

Only two people can now stop the coming train-wreck. Chancellor Angela Merkel and her finance minister Wolfgang Schauble, a man who masks his passion for the EU cause behind an irascible front.

Syriza have made a strategic blunder by turning their struggle into a fight with Germany, demanding Nazi war reparations, and toying with the Russian card at the very moment when Mrs Merkel is locked in make-or-break talks on Ukraine with Vladimir Putin.

Mr Varoufakis is trying to limit the damage, praising Mrs Merkel as the "most astute politician" in Europe, and Mr Schauble as the "only European politician with intellectual substance" - a wounding formulation for the others. He has called on Germany to cast off self-doubt and assume its roll as Europe's benevolent hegemon, almost as if he were evoking the glory days of the Holy Roman Empire when pious German emperors stood as guarantors for Christendom.

This is the only pitch that will work. Angela Merkel has risen above her narrow East German outlook and her fiscal platitudes of the early crisis to emerge as the soul-searching Godmother of Europe and the last credible defender of its unity. But even Mrs Merkel can be pushed too far.

This is no recovery, this is a bubble – and it will burst

Stock market bubbles of historic proportions are developing in the US and UK markets. With policymakers unwilling to introduce tough regulation, we're heading for trouble

• 
• • Ha-Joon Chang
  • The Guardian, Monday 24 February 2014 18.00 GMT

'Share prices are high mainly thanks to quantitative easing not because of the strength of the underlying real economy.' Photograph: David Levene for the Guardian

According to the stock market, the UK economy is in a boom. Not just any old boom, but a historic one. On 28 October 2013, the FTSE 100 index hit 6,734, breaching the level achieved at the height of the economic boom before the 2008 global financial crisis (that was 6,730, recorded in October 2007).

Since then, it has had ups and downs, but on 21 February 2014 the FTSE 100 climbed to a new height of 6,838. At this rate, it may soon surpass the highest ever level reached since the index began in 1984 – that was 6,930, recorded in December 1999, during the heady days of the dotcom bubble.

The current levels of share prices are extraordinary considering the UK economy has not yet recovered the ground lost since the 2008 crash; per capita income in the UK today is still lower than it was in 2007. And let us not forget that share prices back in 2007 were themselves definitely in bubble territory of the first order.

The situation is even more worrying in the US. In March 2013, the Standard & Poor 500 stock market index reached the highest ever level, surpassing the 2007 peak (which was higher than the peak during the dotcom boom), despite the fact that the country's per capita income had not yet recovered to its 2007 level. Since then, the index has risen about 20%, although the US per capita income has not increased even by 2% during the same period. This is definitely the biggest stock market bubble in modern history.

Even more extraordinary than the inflated prices is that, unlike in the two previous share price booms, no one is offering a plausible narrative explaining why the evidently unsustainable levels of share prices are actually justified.

During the dotcom bubble, the predominant view was that the new information technology was about to completely revolutionise our economies for good. Given this, it was argued, stock markets would keep rising (possibly forever) and reach unprecedented levels. The title of the book, Dow 36,000: The New Strategy for Profiting from the Coming Rise in the Stock Market, published in the autumn of 1999 when the Dow Jones index was not even 10,000, very well sums up the spirit of the time.

Similarly, in the runup to the 2008 crisis, inflated asset prices were justified in terms of the supposed progresses in financial innovation and in the techniques of economic policy.

It was argued that financial innovation – manifested in the alphabet soup of derivatives and structured financial assets, such as MBS, CDO, and CDS – had vastly improved the ability of financial markets to "price" risk correctly, eliminating the possibility of irrational bubbles. On this belief, at the height of the US housing market bubble in 2005, both Alan Greenspan (the then chairman of the Federal Reserve Board) and Ben Bernanke (the then chairman of the Council of Economic Advisers to the President and later Greenspan's successor) publicly denied the existence of a housing market bubble – perhaps except for some "froth" in a few localities, according to Greenspan.

At the same time, better economic theory – and thus better techniques of economic policy – was argued to have allowed policymakers to iron out those few wrinkles that markets themselves cannot eliminate. Robert Lucas, the leading free-market economist and winner of the 1995 Nobel prize in economics, proudly declared in 2003 that "the problem of depression prevention has been solved". In 2004, Ben Bernanke (yes, it's him again) argued that, probably thanks to better theory of monetary policy, the world had entered the era of "great moderation", in which the volatility of prices and outputs is minimised.

This time around, no one is offering a new narrative justifying the new bubbles because, well, there isn't any plausible story. Those stories that are generated to encourage the share price to climb to the next level have been decidedly unambitious in scale and ephemeral in nature: higher-than-expected growth rates or number of new jobs created; brighter-than-expected outlook in Japan, China, or wherever; the arrival of the "super-dove" Janet Yellen as the new chair of the Fed; or, indeed, anything else that may suggest the world is not going to end tomorrow.

Few stock market investors really believe in these stories. Most investors know that current levels of share prices are unsustainable; it is said that George Soros has already started betting against the US stock market. They are aware that share prices are high mainly because of the huge amount of money sloshing around thanks to quantitative easing (QE), not because of the strength of the underlying real economy. This is why they react so nervously to any slight sign that QE may be wound down on a significant scale.

However, stock market investors pretend to believe – or even have to pretend to believe – in those feeble and ephemeral stories because they need those stories to justify (to themselves and their clients) staying in the stock market, given the low returns everywhere else.

The result, unfortunately, is that stock market bubbles of historic proportion are developing in the US and the UK, the two most important stock markets in the world, threatening to create yet another financial crash. One obvious way of dealing with these bubbles is to take the excessive liquidity that is inflating them out of the system through a combination of tighter monetary policy and better financial regulation against stock market speculation (such as a ban on shorting or restrictions on high-frequency trading). Of course, the danger here is that these policies may prick the bubble and create a mess.

In the longer run, however, the best way to deal with these bubbles is to revive the real economy; after all, "bubble" is a relative concept and even a very high price can be justified if it is based on a strong economy. This will require a more sustainable increase in consumption based on rising wages rather than debts, greater productive investments that will expand the economy's ability to produce, and the introduction of financial regulation that will make banks lend more to productive enterprises than to consumers. Unfortunately, these are exactly the things that the current policymakers in the US and the UK don't want to do.

We are heading for trouble.

Is Britain's economy really on the path to prosperity?

Osborne's autumn statement will likely present a rosy picture of growth. But is it to be short-lived?

• 
• • Heather Stewart, economics editor
  • The Observer, Saturday 30 November 2013 23.12 GMT

George Osborne is expected to be in bullish mood when he delivers his autumn statement on Thursday. Photograph: Goh Chai Hin/AFP

Brightly coloured New Balance trainers are beloved of celebrities, from Ben Affleck to Heidi Klum. But if you buy a pair of the US firm's shoes in Europe or Asia they are most likely to have been made on the edge of the Lake District. From its British factory in Flimby, on the Cumbrian coast, the hi-spec trainer-maker will turn out more than a million pairs of shoes this year, with more than a third of those made from scratch – cut out and intricately stitched by its 245 skilled staff, who spend more than a year learning their trade.

Since the great recession of 2008-09, when production of the high-value "lifestyle" lines that occupy most of its machinists' time was slashed in half, factory manager Andy Okolowicz says things have gradually improved: "We have had three or four years now of very steady business, both in the UK and for export." It has stepped up output of these fashion shoes by 24% this year and hired more than 10 new staff.

This is the US firm's only European factory, selling to markets across the world, including Germany, France, Japan and Australia – and with the union flag stitched prominently on to the back of many of the models, it's exactly the kind of Made in Britain success story the chancellor hopes to see more of as economic growth picks up.

In George Osborne's 2011 budget speech, he laid out a stirring picture of a new model for the British economy: one driven by a "march of the makers", such as Flimby's trainer-stitchers, instead of what he called "debt-fuelled" growth: buy-to-letters, non-stop shoppers and high-rolling City gamblers.

Two-and-a-half years later, as he prepares to deliver his autumn statement on Thursday, the chancellor can finally boast that the long-awaited economic recovery has arrived: growth has rebounded sharply, unemployment is falling, and business surveys suggest confidence has been restored. As Simon Wells of HSBC puts it, the economy has moved "from a state of despair, to repair".

In March, the independent Office for Budget Responsibility, which draws up the forecasts Osborne uses to plan his tax and spending policies, was expecting negligible growth of 0.6% this year. City experts now forecast more than double that. Similarly, the OBR's 1.8% projection for 2014 now looks far too pessimistic. New forecasts, to be published alongside Osborne's statement, are expected to be rosier and the chancellor is likely to repeat his claim that the UK is now set firmly on the "path to prosperity".

In fact, with a number of eurozone countries barely out of recession, it would hardly be surprising if the chancellor allowed himself a Gordon Brown-style bout of economic Top Trumps, comparing the relatively upbeat outlook for the UK with the gloomy prognosis elsewhere.

"Osborne is probably looking forward to this autumn statement, because he doesn't have to announce that growth forecasts have been revised down for the umpteenth time," says Lee Hopley, chief economist at manufacturers' group the EEF.

Yet, as James Meadway of the New Economics Foundation puts it, "this is definitely not the recovery the coalition wanted or forecast". The breakdown of the latest growth figures showed that business investment – critical for rebuilding a new-style, more productive economy – is down by more than 6% year on year; exports are all but flat, despite the 20% fall in the value of the pound since the crisis; and manufacturing output remains 9% below where it was in 2008, despite the successes of the likes of New Balance and Britain's rampant car-makers.

In Flimby, Okolowicz explains that, while it's undoubtedly a success story, his factory is the final remnant of a much larger shoemaking industry in the area: K shoes and Bata once had plants locally, employing several thousand staff, instead of fewer than 300 at New Balance. Britain is a long way from recapturing its role as an industrial powerhouse.

Hopley, of the EEF, says for her members, this year has been, "good, but not spectacular".

Meanwhile, consumer spending is expanding strongly, borrowing is up and house prices are reviving across a swath of the country. Meadway says: "This is not a recovery, it's essentially a reversion: we're going back to the same kind of economy we saw in 2004 or 2005." Mark Carney, governor of the Bank of England, recently said he expected three-quarters of growth over the next year or so to come from consumption or housing – but many economists fear that's a risky model.

In the capital, some of the worst excesses of the property boom years are back. Aggressive estate agents are pushing leaflets through homeowners' doors and lining up scores of buyers to jostle with each other at "open days". Penthouses in the lavish Battersea Power Station redevelopment are expected to go on sale – most likely to overseas buyers – for £30m. And official figures show the UK now has a record number of estate agents.

In many parts of the country, the housing market is barely stirring from a five-year slumber. But the Bank's financial policy committee – the 10 people with the job of bursting future bubbles – have become so concerned about signs of froth that they have scaled back the government-backed Funding for Lending scheme so that it will no longer subsidise mortgages.

Some lenders have said the removal of the Bank's support, which Carney described as "taking our foot off the accelerator", will make little difference because the market has now gathered momentum of its own. But others believe the rise in mortgage rates that is likely to result will be enough to pour cold water on the growing mood of optimism.

As for consumer spending – the other major support for economic growth over the past six months – since wages have continued to lag behind inflation this latest shopping spree appears to have been fuelled not by consumers' growing spending power, but households dipping into their savings or taking out loans – including the short-term, high-cost payday loans that have caused growing political controversy.

"It feels as if there's a significant lag factor between the economic indicators and what it means for real people in their real lives," says Gillian Guy, chief executive of Citizens Advice, whose advisers see two million people with debt problems each year. She says that the spread of insecure, short-term contracts and part-time work, together with benefits cuts and paltry wage growth, have meant that many people in work are struggling to make ends meet.

That's a picture echoed by Chris Mould, executive chairman of the Trussell Trust, which runs 400 food banks up and down the country, providing three days' worth of emergency produce for people in dire straits. "We're seeing more and more people in crisis coming to food banks and we anticipate the numbers of people who find themselves in financial crisis as a proportion of the population to go up in the next few months. Generally, people are being severely squeezed by price rises – energy costs, rent, food – and the price rises in these areas are running way ahead of inflation."

Osborne hopes that, as the recovery gathers pace, employers will start to loosen the purse-strings, hiring new staff and offering more generous pay, helping to ease the squeeze for consumers and validating the mood of rising optimism. But both Guy and Mould fear it may be a long time before the people who come through their doors are able to make ends meet; and if rising real wages fail to materialise, the consumer upturn could prove short-lived. There's no doubt that the backdrop to the autumn statement is far rosier than anyone, not least Osborne himself, could have hoped six months ago. But Britain's economic resurgence is far less of a victory for the likes of Flimby's highly skilled machinists, and more of a blast from the "debt-fuelled" past than the coalition would have wished – and, as yet, there's no telling how long it will last.

What kind of a recovery is this when so many people are crippled by debt?

Financial despair, often fuelled by payday lending, poisons the present and undermines hope and opportunity

• 
• • Stella Creasy
  • The Observer, Sunday 6 October 2013

Anti-payday loans campaigners at Brighton for the Labour conference. Photograph: David Levene for the Observer

Britain is once again being talked about as a place of prosperity. We are told to be relieved that the worst of the financial crisis has passed; the nation is becoming, according to David Cameron, a land of opportunity. Yet the same government that talks tough on national debt turns a blind eye to the personal debt the public have racked up on their watch. So while confidence may return to Britain's elite, millions of others endure sleepless nights about their future.

These are the people drowning in debts built up coping with the consequences of a recession in which wages froze but prices continued to rise. With little help from the government or banks, payday lending filled the gap. That leaves many people trapped, balancing multiple loans with multiple companies. They are trying to put food on their tables and heat their homes while paying off high-cost debts. One constituent was juggling eight different payday loans, to try and cover lost hours at work. She eventually lost her flat and only cleared her debt with her redundancy payoff; she is now back in rental property.

Last week, a Sure Start in Walthamstow, north-east London, told me of 30 clients served with eviction notices the day the benefit cap was introduced. Parents not even given a chance by landlords now face an overcrowded private rental sector that shuns housing benefit claimants. Several have been referred to social services as fears about debt and homelessness create unbearable stress.

Benefit cuts are the tip of the iceberg of pressures pushing the public into the red. As working hours have been slashed, so a wave of part-time jobs has led to underemployment and wasted productivity. Rail and energy prices have rocketed without competition from government to drive down the costs of getting to work or keeping warm. Asking those with thousands in unsecured personal debt – our current national average is £8,000 and growing – to take on risks and responsibilities is a non-starter. What hope saving for old age or social care costs, sending children to university or a housing deposit when the end of the month, let alone the end of the year, appears so distant for so many?

Which is why the toxicity of payday lending doesn't just feed today's cost of living crisis, but affects tomorrow's country of opportunity too. Cameron talks about prospects, but by his inaction we know his vision is one for the privileged few.

The failure of Project Merlin to lend to businesses shows coalition incompetence; the failure to provide affordable credit to our communities in such circumstances is inexcusable. Little wonder payday lenders now make £1m each week bleeding cash from consumers desperate to bridge the gap between a rocky jobs market and rising everyday expenses.

Such borrowing only compounds budgeting problems. Debt charity StepChange report 22% of payday loan clients have council tax arrears compared with 13% of all other clients, and 14% of them are behind on rent compared to 9% of all other clients. Such difficulties are music to the ears of companies for whom the more in debt a customer is the more profit they make.

Not every customer gets into financial difficulty, but enough find the price they pay for credit means they have to borrow again; 50% of profits in this industry come from refinancing, with those who take loans out repeatedly creating the largest return. One company makes 23% of its total profit from just 34,000 people who borrow every month, not able to cover their outgoings without such expensive finance. In turn, such loans devastate credit ratings, leaving users few other options to make ends meet.

Plans from the Financial Conduct Authority to limit rolling over of loans and lender access to bank accounts offer some progress. Yet until we deal with the cost of credit itself, there is little prospect of real change or protection for British consumers. Capping the total cost of credit, as they have in Japan and Canada, sets a ceiling on the amount charged, including interest rates, admin fees and late repayments. This allows borrowers to have certainty about debts they incur and firms have little incentive to keep pushing loans as they hit a limit on what they can squeeze out of a customer.

Lenders aggressively campaign against such measures knowing their profits, not customers, would take a hit. They threaten that caps would drive them out of business and push borrowers to illegal lenders – when evidence from other countries shows the reverse is true. Labour's commitment to capping in the face of such industry and government opposition reflects not just different priorities but different perspectives about in whose interests to act.

Only this government would make a virtue of defending companies that most now agree are out of control. The Office of Fair Trading is so concerned it has referred the entire industry to the Competition Commission. Its report into payday lending details how consumers are repeatedly sold loans they cannot hope to clear. The Citizens Advice Bureau found 76% of payday loan customers would have a misconduct case to take to the Financial Ombudsman. Despite overwhelming evidence of the toxic nature of their business model, these companies are being allowed to continue trading as if the consumer detriment it causes is a matter for the borrower to navigate rather than of public interest to address. Wanting to get regulation right should not prevent us from acting to avoid what, if left unchecked, will no doubt become the next mis-selling debacle akin to PPI.

In its willingness to front out concern about the fate of its 5 million customers, the danger is that this industry – and this government – wins the argument. They portray financial regulation as anti-competitive, anti-personal responsibility and anti-British, conveniently overlooking the market failure their behaviour represents.

This fosters a pessimism that the best we can do is pick up the pieces of the lives ruined, homes lost and credit ratings destroyed by companies exploiting the desperation of a country living on tick. Supporting alternative credit is vital, but so, too, is securing an alternative credit market and collective consumer action.

The longer we wait to learn the lessons of other countries on the use of caps, real-time credit checking and credit unions, the more people these legal loan sharks will snare into a cycle of inescapable debt – and a future where that land of opportunity is all too far away.

Stella Creasy is Labour MP for Walthamstow

Osborne economics is not an invincible force of nature

Although many appear resigned to life under this dysfunctional capitalism, there is a way to make the system less inhuman

• 
• • John Harris
  • The Guardian, Friday 16 August 2013 20.30 BST

'As the followers of Thatcher and Reagan intended, everything has become individualised.' Photograph: AP

Britain is on the move, says George Osborne, from "rescue to recovery". But not if you're young: this week's unemployment figures showed joblessness among the 16-24s rising to 973,000. Not if you're the north-east, the north-west or Wales, where the out-of-work numbers have also risen. And if you've been on the dole for more than two years, heaven help you: despite the millions blown on the work programme and Osborne's alleged green shoots, the numbers of people suffering long-term unemployment jumped by 10,000 to 474,000, the highest figure in 16 years.

Some recovery, then. At the same time there are even more signs of the ongoing pinch affecting those people once thought to be safe, in the aspirational middle. In the Economist this week there is a very incisive graph plotting median real earnings and the retail price index. It shows the former keeping pace with the latter until 2005, when they began to split. From 2009, moreover, the earnings line began to drop, while prices carried on rising: the UK, we now know, has one of the worst recent records on real wages of any country in Europe (worse even than Spain, which is saying something).

"The plate tectonics of the labour market offer the best explanation for this," said the accompanying text. "With a declining industrial base, the British economy needs fewer mid-level skilled workers. Most new posts are low- or high-paying ones … Many in the middle lack the skills to move up and are pushed towards the low-wage end of the economy. Machinists and tradesmen become cashiers and call-centre workers." They do, and when that happens, they are ushered into that fragile part of the labour force we now know as the Precariat, where zero-hours contracts are becoming the norm, and a return visit to the jobcentre is never far away.

Meanwhile, the cost of living continues to soar, not least in the parts of the country held up to be the recovery's heartlands. In the last year, food prices have risen four times as fast as average pay. There are now plans to make water meters compulsory for people served by nine of the UK's water companies, which could lead to some family bills doubling. This week also brought news of more increases to train fares, some of which could go up by as much as 9%.

And who will that hit? Among others, commuters who have often fled from London's impossible house prices – which, according to this week's headlines, have lately risen by 8.1%, the biggest jump in two-and-a-half years. Entirely unsurprisingly, the share of Londoners renting on the private market is up from 18% in 2011 to 25% today. And an increase in demand colliding with flatlining supply means only one thing: the average share of income devoted to rental costs is now a jaw-dropping 27%, up from 21% a decade ago.

This is what a completely dysfunctional version of capitalism looks like. The crudest, most stupid, completely self-destructive formula for maximising profits – cutting wages while pushing up prices – is extended over the entire economy. An ever-increasing dependence on the service sector drives out skilled jobs in the middle, and offers no hope to those places which are still a byword for the end of heavy industry and manufacturing. The nation's capital becomes the playground of the people at the very top, serviced by young people who can live cheaply(ish), and people from overseas who are just about able to cope, on the basis that they might eventually go home. Housing, surely any worker's most basic need, is in permanent crisis. And for a lot of people trying to keep pace with forces that are out of anyone's control, there is only one option: residence in what the economist Ann Pettifor this week called Wongaland, where people borrow unsustainably while saving absolutely nothing (see right).

And so to an interesting question: what are the politics of all this? On my office shelves, there are two books whose titles – both of which include the word "great"– neatly encapsulate the most important developments of the last 30 years. One, titled The Great Divestiture, is by Italian economist Massimo Florio. It chronicles the revolution that took industries and services once delivered by the state into the private sector, and thereby relieved politicians of accountability for their machinations, not least when the monopoly capitalists in charge started to endlessly push up prices. The other is The Great Risk Shift, by US academic Jacob S Hacker, a very prescient look at how employers, with the complicity of governments, have spent the past few decades shoveling responsibilities on to the narrow shoulders of their workers.

From the perspective of the individual the consequences look bleak. The government cannot much help people; and the companies and corporations that depend on their employees' labour offer increasingly little in return. As the followers of Thatcher and Reagan intended, everything has become individualised, to the point that even the pump-priming of a dormant economy is now a matter of debt-driven consumption, as the summer's unexpected surge in spending suggests. Political discourse has inevitably shrunk: we mostly hear politicians talking about "welfare" and immigration not just because of the political dividends they are said to produce, but because they represent some of the only things related to economic wellbeing that they think they can actually affect (and in the case of immigration, that's a fantasy anyway). Talk to the young people who are at the sharp end of the modern economy, and where we might be headed becomes clear: to a lot of them, the most basic features of the economy are like the weather: thoroughly depoliticised, and to be fatalistically accepted.

Yet perhaps something is stirring. This week's big thing has been the carpeting – and egging – of Ed Miliband. Certainly, Labour should be doing much better. But its people have been talking for quite a while about a cost of living crisis. Their proposed solutions still look flimsy, but that is perhaps down to the fact that when faced with a hegemonic economic model – one, moreover, in which they have long acquiesced – most Labour people understandably do not even know where to start. Not that long ago, it looked like their leader might: he was at least talking about the squeezed middle, responsible capitalism and Hacker's ideas about "pre-distribution". If it's not too late, they are themes worth reprising – though whether people might be perplexed by the spectacle of a politician taking issue with things they see as invincible forces of nature is a very interesting question.

As we move into the succession of zombie jamborees that is conference season, one other thought occurs. Humankind long ago invented things that could at least retilt the balance between capital and labour, and ease some of modern life's most inhuman aspects. We called them trade unions. Most Tories would rather they did not exist: now, even people in the Labour party want to push them even further to the margins. If they do, they will be adding to the problem, when the increasingly poor, huddled masses they represent could really do with some solutions. To turn Osborne on his head, recovery alone is not the issue: rescue is what people need.