UK Economy - is not bad, good enough.

Conservative economists are making much of ‘favorable’ economic indicators. Is this justified?
At best the UK Economy is still bumping along the bottom so we are not seeing a recovery here.  It is true that we are not falling further behind, but since when has not too bad been good enough.

INFLATION in the UK fell in October. The Consumer Prices Index (CPI) fell to five per cent from 5.2 in September, while the Retail Prices Index (RPI) fell from 5.6 per cent to 5.4.

So everything is rosy then?

Both measures are above the Bank of England's two per cent target rate which is not good. The reasons for the fall are complex but are in large part due to a fall in food prices and the costs of fuel and air transport. These however are not indicators of a better economic position but are proxy indicators of price competition between vendors distorting markets.

Why do we care? As long as prices are low!

Prices will not remain low. Right now supermarkets (for instance) have limited resources to spend on an extended price war and the price cuts will not last long. They may bounce back viciously. If it happens this would come just as the impact of public sector job cuts is only starting to be felt  and the government’s reassurance that the private sector would absorb those who have lost their jobs vain hope.

The context within which this is happening is not favorable either. The impacts arising from Europe’s reluctance to grasp the nettle on Greece and now Italy may not be fully felt until later and Asia, our primary source of cheap goods, finds that a slump in western business expansion – principally in manufacturing – is enabling it to put its prices up and to move from sweatshops and low value sectors into high tech and high value manufacturing. In particular those economies with a large healthy sovereign fund in its war-chest are picking up cash strapped western business like berries of a bush.

So what is the government doing about this?

The principal tools used here have been raising interest rates to contain inflation and quantitative easing to increase the money supply and encouragement of the banks to lend to businesses and so stimulate growth.  

However businesses need an active economy to expand into – while growth is flat they are not rushing to expand and this means they are not looking to take on more UK staff. Savings and pensions are being hammered, have been for some while and look set to for a while more.

Things may be working, but they are probably not. We are waiting for better conditions at best, girding our loins for the real battle at worst.  Mostly the measures we have so far have been ineffective and while it may be politically expedient to declare victory when things get better – the reasons for this will be to do with an improving global situation.  So please, don’t expect us to get excited!