The IMF has downgraded its forecasts for the UK's growth this year, dragging them down by more than any other developed country. This should not come as surprise. Any forecaster with any credibility has done the same. The wonder is they ever thought otherwise. Meanwhile, figures for GDP due out this month will most likely confirm that the whole country remains mired in recession.
There’s a very simple reason for this, and he lives in Number 11 Downing Street. Without the Coalition’s austerity programme – even now barely 20% of the way through – the economy would at least display a flicker of vitality. Austerity kills recovery. Government spending cuts means businesses selling less. Businesses selling less start to cut their own costs, making redundancies and cutting wages. Those made redundant or facing falling earnings cut their own spending in turn. A vicious circle is set in train.
This is chain reaction that is devouring Spanish and Greek and other European economies with gusto. Here in the UK, outside of the bedlam of the eurozone, it is less pronounced: not least because, while real economic activity is in the doldrums, the Bank of England has obliging produced round after round of quantitative easing (QE), reinforcing interest rates that – for big borrowers, at least – remain at historically low levels. QE isn’t quite printing money, but it isn’t far off, with the Bank of England shovelling fresh electronic cash to the major banks, in exchange for government bonds.
The net result is banks get to beef up their cash reserves, and government borrowing costs are pushed down. But this is a fat lot of good to anyone else if banks don’t then lend, and government refuses to borrow – which is precisely what both are doing.
Osborne and the Coalition have, with weary familiarity, attempted to blame Britain’s economic woes on the eurozone. It is, of course, true that problems in the eurozone impact on the economy here. The EU accounts for about 40% of British exports, and British banks remain seriously exposed to their troubled euro counterparts. Exports, however, have picked up somewhat over the last two years, due largely to a roughly 30% decline the value of the pound. Exports into the eurozone have declined recently, but remain higher than they were back in 2010. And while fear of a banking crash inside the eurozone is real and growing, the crash has not - yet - occurred.
The largest components in the slump in British output are consumer spending, which has fallen by more than in any previous post-war recession, and, worse yet, business investment – down by some £40bn since its 2008 peak. Throw in efforts by government to reduce its own spending, and everything domestically looks sour.
The worst possible course of action for a government to take, when consumer spending is falling and businesses won’t invest, is precisely the course adopted and doggedly clung to by our own government. The longer it sticks to austerity, the greater the damage will become.
It isn’t enough, though, for government to reverse course. We can’t reset the clock to, say, 2005. We know now that the apparent boom then was unsustainable: built on rising household debts and environmental depletion, covering up for weak or declining real average incomes and a battered, mis-shapen economy. If a reverse in policy is made, it needs to be on the basis of retooling and reshaping the economy, promoting sustainable work. Demanding a return to growth won’t cut it. We need to ask what sort of growth, and for whom.
But for now, the prospects for recovery are bleak. Never mind ‘no return to boom and bust’. Perhaps George Osborne could try ‘no return to boom’?
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