fast the world can change. A year ago, the data and corporate surveys suggested we would be undergoing a square root shaped recovery. The collapse of 2008-09 looked like it would be followed by a mini rebound in 2010-11 (with annual growth of up to 2 per cent), before a return to quasi-stagnation. This best case scenario always looked much gloomier than the implausibly optimistic forecast by the Office for Budget Responsibility of a very strong rebound in subsequent years, a v-shaped recovery. But we now know that the mini-rebound turned out to be truly tiny – and has already run out of steam.
In its latest set of forecasts, the IMF predicts UK growth of 1.1 per cent this year and 1.6 per cent in 2012 and guesses there is a one in six chance the economy could fall back into recession. In part, this is because of a global slowdown: the IMF is slashing its growth forecasts across the Western world. Another reason is the actual and psychological fallout from the Eurozone crisis – but there are also two big UK-specific problems. Inflation has been even higher than feared, slashing real take home pay and slashing the value of bank accounts and homes. UK Plc had convinced itself that the coalition was serious when it said Britain would now once again be open for business. But instead of the supply-side reforms it hoped for, there has been an avalanche of new rules. The good news from reduced corporation tax has been swamped by the bad. None of this has been conducive to corporate confidence and investment.
The IMF thinks UK final domestic demand will be the real drag, falling 0.5 per cent in 2011, which as Citigroup reminds us, would make it the weakest performance in the G7. This would rise by just one per cent year on year in 2012. The big danger in the forecasts is that the IMF expects net trade to add 1.4 per cent to GDP this year, making it the biggest contribution since 1977. If this doesn’t materialise because of the Eurozone crisis, even these gloomy figures would have to be cut further. To my mind, it is clear that the bulk of the drag on demand doesn’t come from the government’s austerity plans but from inflation and subdued businesses. But the IMF said that if activity continues to slow, ministers “should also consider delaying some of their planned adjustment”.
The Treasury must not listen to such siren voices: it is already likely to borrow at least £126bn this year, several billion more than it hoped for. Increasing that by another £5bn or even £10bn will merely rattle investors and companies while doing virtually nothing to boost demand. The 0.7 per cent cut to total public spending pencilled in by George Osborne for this year is the minimum he can get away with while convincing those global funds that are lending him so much money that he is serious about deficit reduction. If this figure slips, it wouldn’t take long for investors to realise that Britain is actually in a very precarious position. The chancellor plans to borrow more over this parliament than Labour did in 13 years. Certainly, Labour’s published plan would have been even worse, increasing debt by 59 per cent, against the Tories’ 51 per cent. But with a deficit which remains among the worst in Europe (and with the added issue that we have the most indebted households in the G7) the UK remains worryingly vulnerable. Now is not the time to borrow even more.
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