Wednesday, 27 April 2011

One Cheer on the Economy...

As the numbskulls aho now proliferate (or politicalbetting as it used to be called) get tied up in knots about a comment from David Cameron and the pros and (to them) mostly cons of AV, the first quarter early GDP figures were announced.

As expected, they showed the economy grew in the first quarter but by a disappointing 0.5% which means, when combined with the -0.5% figure from the fourth quarter of 2010, that the economy has been flat for the past six months with no growth at all.

The first caveat is that this is a first figure and will doubtless be revised up or down slightly as more data becomes available but it's a mildly disappointing number for the Coalition which must have hoped for perhaps 0.7 or 0.8%. At 0.5%, we are looking at annual growth of 2% which is pretty mediocre to be honest and when mixed with rising inflation, has allowed the prophets of stagflation to have a field day.

The figures also show wide disparities in the economy with some sectors doing well and others still struggling. Construction still seems in the doldrums and retail sales are unsurprisingly flat but manufacturing and services have rebounded.

Today's figures will likely mean a continuing hold for interest rates and defers what seems set to be the next delicate balancing act. As the economy recovers, there will be huge pressure to raise interest rates but that runs the risk of stopping that economic recovery in its tracks as households (and especially those which have done well out of the recession through lower mortgage payments) rein in spending.

Politically, Ed Balls was at his ascerbic best in interviews and claimed the Coalition was cutting too far too fast but the Government has two cards to play - one is time, it doesn't need to seek a new mandate until 2015 and the second is the possibility of windfall profits from the sale of shares in RBS, Lloyds TSB and other banks which could be used either to offset the deficit or possibly as ammunition for pre-election tax cuts.

This was always going to be the nadir, the depths of the pit, for the Coalition and rock bottom will be reached next week after the elections but from then on, the signs do look better and as the saying goes, it is always darkest before the dawn.

I suspect Q1 figures will be revised upward and Q2 will show steady if unspectacular growth continuing with borrowing slowly falling.

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