The currrent economy: Mixed messages and a faltering recovery

 

Looking at the macro economic data over the past couple of months the best way to describe it is mixed.

 

On the one hand the general mood around the UK economy seems to have become more negative over recent weeks, annual GDP growth on 0.7% is well down on the coalition’s 2.6% forecast 12 months ago or even the 1.7% forecast in March.

 

However, on a more positive note the UK economy is at least growing and the prospects of the UK avoiding a double dip recession appear better than some other developed economies.

 

Some would argue that this relative success needs to be viewed with caution as the USA and Eurozone both faced more serious deficits (USA) and weak growth (Eurozone) before the recession started.

 

Putting aside international comparisons the fundamental problem faced by the coalition is the strength of the recovery is running well behind the levels needed to hit the government’s deficit reduction targets. Growth returning to the UK’s long term average of 2.5% within a 12-18 month period was central to the deficit reduction strategy. It is important to note that although the austerity cuts were sensitive and headline grabbing; these were actually a relatively small part of the deficit reduction plan.

 

The coalition’s strategy for growth rested heavily on the strength of the global recovery to provide an export and manufacturing led recovery, which would at the same time help to rebalance the economy away from an over reliance on financial services.

 

However it seems clear from continued weakness in key UK export markets such as the USA and the Eurozone, that in the short term this strategy is unlikely on its own to provide the required impetus to growth, and more is needed stimulate growth on the domestic front.

 

Against this backdrop in recent weeks voices have been getting louder for the government to do more to stimulate domestic growth, although views differ as to what policies should be used and what the mix between fiscal and monetary policy should be.

 

On the fiscal policy side the government is certainly showing little sign of backing down on the austerity programme. However some have argued that by projecting to halve the structural deficit in 4 years, but only pledging to do it in 5 years, the government has allowed itself some room for manoeuvre to provide some limited fiscal stimulus, and we may see in the coming weeks some infrastructure spend being brought forward to try and provide this.

 

What is more likely is that the government will again rely on a monetary policy stimulus from the Bank of England. Expectations have been raised that the Bank of England will announce another round of Quantitative easing in the coming months, possibly as early as October.

 

In summary the UK is performing relatively well compared to other developed economies, but more needs to be done to boost the confidence of businesses and consumers in the strength of the recovery.

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