IT was only last week that many economists were tearing their hair out, despairing at appalling UK GDP figures for the final quarter of last year and hoping that they didn’t signal the onset of a real problem. Those preliminary figures – suggesting output fell 0.5 per cent – came laden with caveats, however, and with statisticians estimating that bad weather in December (and Britain’s appalling inability to cope) were responsible for much of the disappointment. This newspaper, while surprised and worried, was emphatic that it was too soon to panic.
Yet many Cassandras ignored the fine print and held up the figures as proof Britain was falling off the cliff, presumably because of spending cuts (the fact that aggregate government expenditure is still rising, apart from on capex, didn’t trouble them). Fortunately, they were wrong. The economy has slowed compared with the buoyancy seen in February to October 2010 – and job creation remains too weak for comfort – but we are not anywhere near recession. Key surveys in recent days have confirmed that growth bounced back in January – and that the fourth quarter figures massively exaggerated the extent of the UK’s problems.
The services sector purchasing managers’ index (PMI) climbed from December’s 20-month low of 49.7 to 54.5 – the highest level since last May. A figure above 50 indicates growth. Earlier this week, the manufacturing survey came in extremely strongly, and the construction survey also bounced; the outlook, once again, is for growth of up to two per cent this year. Not great but not bad either in the context of rising interest rates, galloping inflation and oil prices, higher taxes, fiscal tightening and an economy held back by a bloated government, regulatory costs, poor education and a problematic infrastructure.
When the weak GDP figures were released, Labour’s shadow chancellor Ed Balls was all over the airwaves, looking a tad gleeful – yet he was nearly invisible yesterday, suggesting a strange negative correlation between face time on TV and the state of the economy. Of course, it is vital that politicians argue over how best to mend the economy but the Labour Party won’t be doing itself any favours if it gives the impression that it would rather have a recession than a recovery. This is not to let the coalition off the hook: its policies are all over the place, it is putting up taxes and not doing enough to cut burdens on enterprise and wealth-creation. It needs more pro-growth, supply-side policies.
No Western society could cope with another recession; budget deficits remain almost unbearably large and monetary policy ultra-loose. Inflation and cost pressures are accelerating, as every single survey has confirmed, including yesterday’s. Increasing inflation can easily go hand in hand with stagnation or outright recession. Another slowdown would halt rate rises and allow inflation to spiral out of control, with devastating effects.
The February MPC vote is on a knife-edge, according to the MPC-ometer designed by Henderson’s Simon Ward. It is designed to predict decisions based on economic and financial information. The model suggests a 4-4-1 split (with Adam Posen calling for more QE), leaving the hawks just short of a majority. Spencer Dale and Paul Tucker are plausible additions to the Andrew Sentence-Martin Weale anti-inflation axis. Rates are going up – and sooner rather than later.
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