Tuesday, July 20, 2010

Dancing on the edge

We've been told repeatedly that the current economic strictures are actually all Labour's fault and that these cutbacks are essential to keep us from facing the Greek nightmare.

But what if Osborne has got it all wrong? How much will the Tories be blamed for dragging us back into recession?

Sunny Hundal over at Liberal Conspiracy reveals that the fiscally-tough budget appears to have caused industry confidence to drop - by the largest amount in the fourteen years that it has been conducted. Bear in mind that that means that it is a larger fall in confidence than that following the 9/11 attacks or the collapse of Lehman Brothers.

CIPS CEO David Noble said:

June’s data painted a worrying picture for the UK services sector as confidence suffered a serious blow following the government’s emergency spending cuts. Purchasing managers voiced grave concerns that budget cuts and VAT rises will tip the scales and amplify the likelihood of the UK slipping back into recession.

And here’s Paul Smith, senior economist at Markit,

While we continue to look for a 0.4 to 0.5 per cent rise in GDP for Q2, this may well already represent a peaking in the recovery cycle. Confidence declined to the greatest extent in 14 years of data collection in reaction to the government’s austere emergency Budget, with concern expressed that the fiscal tightening could push the country back into recession. Indeed, the less positive outlook appears to be already affecting decision-making, with some clients reportedly reluctant to commit to new business at the present time.

We also know that bank lending to businesses is £100 million down on the same time last year, investment is down and we have a widening trade deficit, which prevents the Canadian solution of exporting our way out of recession. The pound has dropped 25% over the past couple of years, but even that isn't sparking the export market. To further sweeten the pill, the housing market is also struggling, with Deloittes promising falls of 30% by the end of the year and PWC reckoning that the market is screwed for the next decade.

And the credit agencies have just downgraded Ireland from the valuable - and cost-saving - AAA rating, although it has to be pointed out that Ireland has significant problems with recapitalising the AIB bank and was also very badly hit in the construction and financial services sectors, rather disproportionately. Direct comparison between economies is always dangerous, but if we have people continuing comparing us to Greece, then pointing out that vicious retrenchment may not prevent a ratings downgrade.

The more I see of this, the more I fear that Osborne has got it massively wrong. I just cannot see that the circumstances exist whereby these cuts will stimulate the growth that he expects. As Larry Elliott points out, there is no plan B. Things look bleak.

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