Hamish McRae: Economic crisis has taken on a new and ugly twist

A slowdown, or something worse? Our economy is an unusually open one, so what happens here depends very much on what happens in the rest of world. We may do a bit worse than our neighbours or a bit better, but provided the tide rises we stay afloat.

The first half of this year has been a bit of a puzzle. The official figures show an economy that is growing only very slowly, but the initial numbers are invariably revised and usually upwards. The economy does seem to be generating more employment than the poor growth numbers would lead people to expect, with the private sector creating three to four new jobs for every one lost in the public sector.

Consumption has been squeezed by low pay rises and high inflation, to be sure, and the squeeze on public spending may be starting to take effect. Individuals, like the Government, have a lot of debt to pay back, which they have started to do.So there is no feel-good factor. Nevertheless it may turn out that growth during the first half of this year has not been that dismal after all.

If the first half is a puzzle, the second half is a worry. The forward-looking UK data is not too bad, with the all-important services sector still signalling steady growth. But the external outlook has darkened in recent weeks and may well darken further.

It is a two-speed world. The emerging economies continue to grow strongly, and those developed countries that have been particularly adept at exporting to them, notably Germany, are benefiting from that. The raw material and energy producers, including Canada and Australia, are also winners from this growth. But most of the developed world has been struggling, and those struggles seem more troubling now than they did in the spring.

European confidence has of course been damaged by the travails of the weaker eurozone members. You would expect that. But now the crisis has taken on a new and ugly twist. Fears that governments may not be able to service their debt have spread beyond the bailout countries to Spain and Italy. Even France has seen the cost of borrowing rise sharply just this week. When Greece got its second bailout, European officials hoped that at the very minimum this would buy several months of calm. Those hopes have been dashed, and while it is possible that they will be able to retrieve the situation in the coming weeks, the whole of continental Europe will be worrying about its savings and its jobs through the autumn. That is no recipe for growth.

As for the US, there is not much point in adding to the mountain of comment about the events of the past few days. No one thinks this is a good way to do things. The even more substantial concern is that the US economy is only inching forward: growth is not nearly fast enough to attack unemployment, stuck at close to 10 per cent. It would be great to say that the US is about to turn a corner and put on a spurt, but alas there is no evidence of that.

Our own difficulties have to be seen in context. We are perceived by the world as having made a decent start at getting our public finances under control. Individually we are busy paying down mortgages and clearing credit card debt – or at least in total we are. And our best companies are doing just fine. But the slower the growth the tougher it is at every level, and one thing is sure: there is no boom visible in the months ahead.