Monday, 1 August 2011

Scenarios for the UK economy

Blog from the IMF setting out possible scenarios for the UK economy. They think that a gradual recovery is most likely, but call for nimble policy responses if that doesn't happen: Economy

They anticipate a gradual acceleration of growth to 2.5 per cent which would be good if it happened, although I am less sanguine than them about productivity. It's also worth noting that two of their scenarios refer to high inflaton which is what is really squeezing incomes rather than austerity.

1 comment:

Joshua Payne said...

The tone of the comments in the link seem over-optimistic.

Again, it's likely that growth will prove impossible because debt-based stimuli are being withdrawn faster than anything else will emerge in the economy to compensate for this.

A major element of the predicament here is the excessive power that employers possess in the British labour market.

As regards debt, an interesting but worrying observation is that private debt (in particular mortgage borrowing) rose considerably just as the New Labour government begain to indebt itself in 2002. That is to say, high government spending on state-sponsored jobs in health and education 'injected' debt into the system as a whole. The outlook is I think very bad, since the Coalition isn't specific enough about what will act as a replacement when these jobs disappear. The higher you fly the further the fall, and there will be lots of angry and upset people around!

Brown promised "to borrow only to invest"; he didn't do this, and the reason is that spending does not necessarily imply "investment". A common theme of analyses I read is their reference to the distinction between 'self-liquidating' and 'non-self-liquidating' debts. In other words, some government spending constitutes a productive fiscal policy, but a lot doesn't.

I'm genuinely starting to worry about the impeding collapse of the economy here. Public service jobs like teaching have been extremely popular, but the sector will undergo contraction. What else will prove both popular and easily available instead? Optimistic forecasts are presented, but we're already witnessing signs of a severely distressed economy (for example, an explosion in aggressive forms of begging in and around Birmingham).

Meanwhile, the euro is seen as good enough for both Ireland and France, yet here we experience complacent and insulated elderly people resisting any change. I cannot see how retaining control of our own interest rate has helped us much; devaluation has not worked as a stimulus, and at some point we are likely to lose this 'control' as the base rate is *forced* upwards.