Today’s FT front page story reports that Mervyn King is admitting that both the recovery and the public finances are off track. So far so good, it’s welcome to see a senior policymaker admitting this and the fact that King is saying this comes as no surprise given the Bank’s decision to resume quantitative easing – a clear sign that it does not think things are going well.
However King goes on to blame to the crisis in the Eurozone for the economy’s current problems:
“We were on track,” Sir Mervyn told a business audience in Liverpool, “but the problems in the euro area and the marked slowing in the world economy have lengthened the period over which a return to normality is likely”.
I’m not so sure about this. It is already fairly clear that this is also George Osborne’s line – ‘things were going fine but now there’s a problem in the Eurozone which is impacting us’. I don’t doubt for a moment that the major crisis in Europe is impacting on UK business confidence, hitting our exporters and has the potential to be a major blow to the financial system.
But the economy hasn’t grown for nine months. Our problems clearly predate the intensification of the Eurocrisis.
The Treasury’s latest round up of independent forecasts for the UK was published this morning – the consensus estimate for 2011 growth has fallen again, to just 1.0%. This is part of a clear trend as the chart below demonstrates:
This chart shows the average growth forecast of a wide range of forecasters for 2011 at various points in time. As is clear it has been falling since January 2011.
What is even more useful is to look at the reasons why this estimate is falling. Comparing the January forecasts to the latest ones reveals some interesting details. Back in January the economy was expected to grow by 2.0% against 1.0% now. But the composition of that growth was very different.
In January independent economists expected domestic demand (government spending, consumer spending and business investment) to add 1.4% to growth and net trade (exports minus imports) to add 0.5% (the numbers don’t always sum exactly due to rounding).
Now economists expect domestic demand to subtract 0.4% from the economy as consumers, business and government all cut back whilst they expect net trade to add 1.3%, much more than previously.
In other words, in the last ten months, economists have come to believe that our exports will do better than they originally thought but have become more and more pessimistic about the domestic situation.
The recovery is certainly off track but this is a home grown crisis. Yes the Eurozone has the potential to make things much worse but the government can’t use it as an excuse for our current problems.