Skip to main content

Darling's Double Dip Disaster

The UK has released the latest GDP numbers: on 40% of the data, the statistics show that the British economy finally returned to growth... of 0.1%. The consensus forecast was for 0.4%, so there is no doubt that these growth numbers are disappointing, and there is still the scope for them to be revised downwards. Meanwhile next months numbers are likely to be worse, given the slowdown in retail spending that the increase in VAT is likely to bring about.

So it may be that the British economy has not even come out of recession, and even if it has, it may go back into negative territory at the next data point.

This comes despite the fact that the British government is continuing to run a double digit deficit; A deficit that is not sustainable and which must be reduced sharply. The fact is that those who are seeking to put a positive gloss on the situation of the British economy are missing the point: the country has still not escaped from its fool's paradise where property is always a one way bet and that it is legitimate to borrow as much as possible at today's "low rates" in order to get on the property escalator for the future.

However, the rapid increase in inflation is not just a function of base effects: the whole structure of the British economy is now paying the price for the devaluation of Sterling over the past two years. The Bank of England is signalling that it will not increase rates even if the inflation numbers over the next two quarters are worse than expected. The Bank is trying to avoid the blame for tipping the economy back into recession by raising rates too soon.

Yet all that is happening is that the low rate environment is keeping the UK housing market at an unsustainable peak. The imbalances of the British economy can not be corrected while House Prices are 20% above any sustainable level. As CQS observes in their latest briefing: the outlook is for considerable turbulence in the UK economy.

The risk that the Bank of England runs be keeping rates low is that the erosion of Sterling that high inflation causes becomes a collapse in confidence in the currency.

As I have noted before, the choice is stark: either keep rates low and risk a Sterling collapse or increase them and trigger a house price fall, with a risk of further problems in the banking sector. For the time being, the market believes that the Bank of England will have to raise rates quite soon. If they are disappointed then there is a real risk that the Pound becomes permanently dislocated from its previous trading range and drops to parity with the Euro, or even below.

There is a certain amount of patience still in the market, because the expectation is that a new government will take effective action against the deficit, but the UK is running out of road. If, despite the massive deficit spending, the double dip actually happens, then the policy choices are all very unpleasant indeed. The government after the next election may find that it has to make pro-cyclical cuts in government expenditure even though the economy has returned to recession. Under those circumstances the longest recession since 1945 which we have supposedly just emerged from will look like a phony recession: the impact of Great Recession II will involve the painful restructuring that the Brown government tried to avoid and it will be all the worse for having been delayed. The imbalances in Housing may finally be addressed, but the consequences for millions of mortgage payers will not be pretty.

So, it is not a wonder that there are growing mutterings about the outlook for the British economy over the next few years: and those mutterings could become a roar quite soon. The day of reckoning will come very soon unless there is real leadership at the Treasury and the Bank of England.

Comments

Newmania said…
Now I wish you stuck to what you know ,this is really good .

Popular posts from this blog

Liberal Democrats v Conservatives: the battle in the blogosphere

It is probably fair to say that the advent of Nick Clegg, the new leader of the Liberal Democrats, has not been greeted with unalloyed joy by our Conservative opponents. Indeed, it would hardly be wrong to say that the past few weeks has seen some "pretty robust" debate between Conservative and Liberal Democrat bloggers. Even the Queen Mum of blogging, the generally genial Iain Dale seems to have been featuring as many stories as he can to try to show Liberal Democrats in as poor a light as possible. Neither, to be fair, has the traffic been all one way: I have "fisked' Mr. Cameron's rather half-baked proposals on health, and attacked several of the Conservative positions that have emerged from the fog of their policy making process. Most Liberal Democrats have attacked the Conservatives probably with more vigour even than the distrusted, discredited Labour government. So what lies behind this sharper debate, this emerging war in the blogosphere? Partly- in my ...

Concert and Blues

Tallinn is full tonight... Big concerts on at the Song field The Weeknd and Bonnie Tyler (!). The place is buzzing and some sixty thousand concert goers have booked every bed for thirty miles around Tallinn. It should be a busy high summer, but it isn´t. Tourism is down sharply overall. Only 70 cruise ships calling this season, versus over 300 before Ukraine. Since no one goes to St Pete, demand has fallen, and of course people think that Estonia is not safe. We are tired. The economy is still under big pressure, and the fall of tourism is a significant part of that. The credit rating for Estonia has been downgraded as the government struggles with spending. The summer has been a little gloomy, and soon the long and slow autumn will drift into the dark of the year. Yesterday I met with more refugees: the usual horrible stories, the usual tears. I try to make myself immune, but I can´t. These people are wounded in spirit, carrying their grief in a terrible cradling. I try to project hop...

Are the Liberal Democrats Libertarian?

A few days ago Cicero met with one of the better known figures in the Libertarian Alliance, Brian Mickelthwait . Brian writes for various blogs that I enjoy reading- including Samizdata . Ahead of our meeting Brain expressed "scepticism" about the Libertarian credentials of the Liberal Democrats: "My charge was that when you meet a Liberal Democrat you never know what he will believe. The one who talks to you is likely to say what you want to hear. But the others will simultaneously be telling other people with quite different views what they want to hear. So don't vote for these lying creeps." Political parties- all of them- are coalitions of people who quite often disagree with each other. Apparently we are not supposed to "air our dirty linen in public", but actually one of the reasons that the Liberal Democrats appealed to me was that they were prepared to talk about issues and policies amongst themselves in public. The eclipse of the Liberal Party...