The economy continues to stagger out of recession. Last week, fourth-quarter GDP growth was revised up to 0.3% from 0.1%, although business investment fell at an annual rate of 24% between October and December. While mortgage approvals fell for a second month in January, an index tracking the services sector, the biggest part of the economy, jumped to a three-year high in February, easing fears of a relapse into recession.
But the plummeting pound has overshadowed all this. On Monday it suffered its biggest one-day fall against the dollar in over a year, falling by 3% at one stage. It has now hit a ten-month low of $1.50. A weekend poll showing a sharp slump in the Tories’ lead fuelled fears that a hung parliament won’t be able to bring Britain’s spiralling debt under control.
What the commentators said
The budget deficit is expected by the IMF to hit 13.2% this year, the highest in the G20, said Economist.com, and the overall public debt load is rocketing. Our accumulation of government debt is projected to be second only to Japan’s between 2007 and 2014. Markets have so far been “forbearing”. That’s partly because the average maturity of our gilts is “exceptionally long” – 14 years. But most importantly it’s because the electoral system usually produces decisive majorities that facilitate fiscal tightening. As that prospect recedes, market confidence is dwindling.
Optimists point to the fact that coalition governments tend to be more successful than single parties when it comes to getting deficits down, said Jeremy Warner on Telegraph.co.uk. But most of these precedents are from Europe, and a hung parliament is likely to be unstable here, militating against a rapid and credible deficit reduction plan. At best, “there will be months of wrangling”. But with markets “now beginning to doubt (à la Greece) that Britain has the resolve” to tackle its deficit, “we probably don’t have the luxury of months”.
Without a political consensus on cutting the deficit, market confidence will fall further, said Sam Fleming in the Daily Mail. We then face a loss of our top-notch credit rating. That will trigger higher long-term interest rates – choking our “tentative recovery” – and another slide in sterling. Once again, Britain has “a recipe for a full-blown sterling crisis”.