Thursday, 27 January 2011

A note of caution

A welcome note of caution here about reading too much into one quarter's GDP figures, particularly when they have been distorted by bad weather: GDP

This article rightly stresses concern about inflation, although talk of stagflation in the City is a bit overdone, particularly for those of us who remember annual rates of 25%+ in the 1970s.

The pound dipped against the dollar after the figures came out because of fears that interest rate rises would be delayed, which seems likely, although two members voted for a rise at the last MPC meeting.

If the Government abandoned its austerity package, sterling would fall and inflation, which is being driven largely by world commodity price increases, would go even higher.


Rob said...

Ed Ball's question to Osborne was why the UK took such a bit hit during the last quarter (with most economists I've heard of only citing the 0.5% as a result of snow) when the US is now doing so well. How would you answer this?

Admittedly if the government now backtracked on their initial plans confidence would fall and uncertanties escalate. But did you support the Coalition's economic strategy in the first place?

Wyn Grant said...

The US is simply a much stronger economy than the UK and consumer demand is recovering rapidly, but it has a massive budget deficit which the administration is talking of tackling but is unlikely to do so. The UK has been living beyond its means in terms of public and private consumption for some years. Any government would have to cut. However, the cuts in local government may be too severe and too front loaded.

Rob said...

I agree that any government would have to address the deficit and that the Coalition's cuts are too extreme in many areas.

However we surely can't neglect the stimulus argument. It's my belief that the austerity-stimulus debate is grossly reductionist and a huge grey area in between the two can be exploited. But nevertheless there remains an argument for saying we do not need to cut, and it's propogated by people like Joseph Stiglitz and Paul Krugman. Did you read Krugman's criticisms of the Coalition's fiscal policy in his New York Times column last year?

The Coalition have largely won the argument on stimulus versus austerity but this is partly because people are saying there is no other way and any government would have to do it. Eventually yes perhaps. But those such as Krugman argue that it's crucial we do not cut now.

Wyn Grant said...

I'm aware of the Krugman piece. We could postpone the cuts if we were prepared to accept a fall in sterling and a further boost to inflation and a downgrading in the UK credit rating which might boost the cost of servicing debt.