Hamish McRae: Industrial output is on the up, but it will be a while before we see it here in Britain

Economic View

Industrial output in the world economy is now ahead of its peak of early 2008.

That is not very new news, for in fact it passed that level back in July, and output in the world is by now solidly ahead. But I didn't know it until a few days ago and I have not seen this news reported in any of the main media. We in the UK are still worrying about the security of the recovery and realistically our GDP will not be back to its peak until some time in 2012.

Much the same goes for the rest of the developed world. So why the discrepancy? Is it just that our media focus on the half-empty view of the bottle rather than the half-full one? Or is it that the politicians want to blame the world economy, and of course the bankers, for their own economic mismanagement? Or is there something else happening that we should know about?

It's a bit of the first two explanations noted above. We do, and not just in this country but also elsewhere, tend to over-report the bad news and under-report the good for reasons I have never fully understood. But it is not just that, nor indeed the politicians' inevitable desire to praise themselves when things go right and blame others when they go wrong.

The fundamental answer comes in two parts, one to do with globalisation, the other to do with the shift from manufacturing into services.

As far as the first is concerned, the basic point is that the industrial output of the developed world is still well below its previous peak, but the output of the emerging world is well past its. Put the two together and the result tracks the shape of the 1970s recession with remarkable consistency. The main graph, taken from some work by Simon Ward of Henderson, plots the output of the G7 main developed nations during the 1970s against the output of the G7 plus the "E7" this time. As you can see, the world is a wee bit ahead of the 1970s cycle.

But who is this E7? These are the seven largest emerging economies, China, India, Brazil, Russia, Mexico, Indonesia and Turkey. According to some work by PriceWaterhouseCoopers earlier this year, the E7 will pass the G7 in total output around 2019, though I can see this happening a year or two earlier. On the right-hand graphs you can catch a feeling for this. At the top is the total industrial output of these two groups. Below is the output of the G7, which as you can see was growing only slowly ahead of the crash. And at the bottom, chasing up behind, is the output of the E7. The graphs are on a log scale and if you just lay a ruler on the trends you could guess the lines might cross over in about five years' time.

But faster growth in the emerging world, however dramatic, is only part of the answer. The other part is that these graphs are looking at industrial output rather than total output. In the emerging world, industry accounts for a considerably higher proportion of GDP than it does in the developed world – just as it did in Britain and other countries when we were at the same stage of development. The trend of the G7, the red line on the graph, has been pretty flat, whereas the trend of the E7, the gold line, is shooting upwards. But the developed world did have some real growth during the past decade; it is just that the growth was concentrated in services rather than manufacturing.

You can see that in the Coalition's own spending plans. We don't have any details of the cuts, but we do know that health will be protected. So the Government is planning for the output of the health industry, a key service industry, to go on rising. It is also seeking to impose smaller cuts on another service industry, education. But it is cutting other spending, for example on defence procurement. So it is saying that it wants to rebalance the economy towards manufacturing and hence away from services. But what it is actually doing over the bits of the economy it most closely controls is quite the opposite. Um.

Several conclusions follow from this. The most obvious is that, viewed globally, not only is the world recovery reasonably secure, but it is at least as solid as it was in the dreadful second half of the 1970s. Next, the focus of industrial output has shifted rapidly as a result of the recession – look at the little dip in the gold line and the off-a-cliff fall in the red one. Third, some shift away from manufacturing in the developed world is inevitable and we should not beat ourselves over the head about it. And lastly, when someone high-up in the Government talks about rebalancing the economy, look at what the Coalition is doing, not at what it is saying.

So what else should we be looking for in the coming weeks? One of the problems is that the noise generated by the spending review is in danger of drowning out the signals from the economy, both here and in other countries. My instinct is that we will have an autumn of discouraging news from the developed world, and particularly from the US.

One worrying thing is the way the US housing market continues to remain at a depressed level. We have a restocking bounce there and elsewhere, but that is over. Until the US housing market picks up, there is unlikely to be much movement in consumer sales and until that happens the recovery in what is still the world's largest economy will be muted. The US, along with Ireland, has had the sharpest peak-to-trough decline in house prices, more than 30 per cent, according to some work by Goldman Sachs, and until there is some sort of floor not very much can happen.

So in the next few months, look for signs of recovery not from the US, but from the rest of the world, and in particular the E7. That is the core message of the graphs above. There is going to be some sort of pause, but the depth and duration of the pause will be determined in China, India and Brazil, not in the US. The recession was made in the US, the recovery is being made elsewhere.

Despite debt, despair and the double-dip, Irish eyes will soon be smiling again

One of the few countries in the developed world where industrial production is back above its pre-crisis peak is, wait for it ... Ireland. But last week there were new figures showing that Irish GDP growth went negative in the second quarter, after a recovery in the first, coinciding with news that the country had indeed to get away a big bond issue, albeit paying about 4 percentage points more for its money than the benchmark for the eurozone's highest rated borrower, Germany.

The double-dip in the economy, coupled with fears about the still-enormous debts of the banking system, has led to a new bout of concern about the Irish government's longer-term strategy. Will things ever come right? I hear from friends there about a sense of despair that the turnabout has become so protracted. Some indicators, such as exports and industrial production, have recovered somewhat, but the mountain ahead seems sheer, and progress up it depressingly slow.

There are some things Ireland cannot do anything about. Until there's a floor on property prices, it is hard to work out total liabilities to the taxpayer. And it has to find a way of coping with the debts of the fully nationalised Anglo-Irish Bank. Ireland is still in the eurozone and the cost of leaving is more than the cost of staying in. Its main export markets in Europe have been slow-growing. It looks as though its debt-to-GDP ratio will peak at around 100 per cent.

But the country has been successful in cutting costs. Its national finances are quite strong, for it has financed most of this year's deficit and has some €20bn cash in hand. My own view is that bond markets are wrong about the country's credit-worthiness and that the spreads will narrow sharply in the months ahead. Another couple of quarters of export-led growth and the mood, not just of the bond markets but of the country as a whole, could shift radically for the better.