30th November 2010
While Europe finds itself deep in another sovereign crisis, the British may be tempted to succumb to a small smile of satisfaction. The economic figures from the Office for Budgetary Responsibility yesterday looked – whisper it – quite good.
For those of a technical disposition, the full report can be found here.
Until relatively recently, the UK was the sick man of Europe. Its sovereign debt was at risk of a downgrade, its government debt levels were eye-popping and its economic growth – for many years sustained by the financial sector – was anaemic.
A mere six months later and the UK's growth rate over the next few years is predicted to be higher than that of Germany, France, Japan, the US, the eurozone and the EU as a whole. Admittedly, this is no longer stiff competition, but it does beg the question: How has this shift been achieved and can it be sustained?
Simon Hoggart sums up this remarkable turnaround in this piece.
More serious is Stephanie Flanders of the BBC, who points out that while the news is good, it is likely to be wrong. Of course, it may not necessarily be worse than expected, but her comments echo those of Bank of England Governor Mervyn King, who recently admitted that their economic projections stood a good chance of being wrong, and might even be significantly wrong.
The biggest area of uncertainty for the UK economy has been the impact of public sector job cuts and here the OBR report offers some cheer. Job losses will not be as profound as expected – between 130,000 and 160,000 lower, depending on the analyst – and this will have implications for the health of the public purse (fewer unemployment benefits to pay out) and the strength of consumer spending (greater consumer confidence).
If this is correct, then the chances are that growth rates can be sustained and deficit targets met. Equally, the Government can take some credit: The OBR suggests that the reason unemployment is lower is its decision to make greater welfare cuts rather than hit departmental spending. No wonder Osborne was allowing himself a ‘gloatette', as Simon Hoggart put it. The FT says that Osborne's gamble looks to be paying off.
Not everyone is convinced: David Rowse on the Citywire site says: "I would suggest that there are so many 'elements' of the unknown that are contained in such forcasting that they are virtually useless. Simply 'guestimates' at best! Like always, I suppose we will just have to wait and see."
There is one banana skin little mentioned through all of this and that is the issue of currency. As the UK grows stronger and stronger, the weakness of its currency is a more glaring oversight by global markets. Of course, no-one in Government will want to draw attention to this, but even in spite of recent appreciation against the Euro, it still looks historically low. Without wishing to derail the euphoria – there has been precious little in recent months – this may become a headwind for the UK economy come 2011.
SIMON WARD DOESN'T SHARE THE OPTIMISM: UK OBR ‘too cautious' on growth