More discouraging data this week added to recent evidence that the economy is turning down again. The PMI index tracking activity in the services sector, which accounts for 75% of the economy, registered its sharpest monthly fall in a decade in August. It remains just above 50, the level that separates expansion from contraction. Retail sales dipped by 0.6% on a like-for-like basis last month. Sales volumes have been stagnant over the past year. Chancellor George Osborne acknowledged that growth had disappointed, but said that the government would not deviate from its austerity plans.
What the commentators said
The outlook is clouding over rapidly, said Capital Economics. Consumer confidence is down to levels that imply falling household spending and demand for exports is fading. The latest activity surveys are consistent with quarterly GDP contracting again. “If this is not a double-dip recession,” said Simon Jenkins in The Guardian, “it is certainly starting to walk, talk and quack like one.”
So what next? With the government sitting tight, many analysts are expecting another round of quantitative easing (QE), or money printing, by the Bank of England to pep up growth. Yet the case for this is weak, said Jeremy Warner in The Daily Telegraph. Our first bout of QE, like America’s two attempts, “failed to lead to sustainable growth”.
The main problem is that with the private sector deleveraging, there is no demand for credit. When this is the case, “almost no amount of forced feeding will induce it”. And more money printing would undermine the currency, stoking inflation and adding to the pressure on real wages and savings. That’s the last thing we need now, “just at the point when the inflationary squeeze on disposable incomes… looks set to ease”.
On the fiscal front, Osborne is right to “stick to his course”, said Andrew Lilico on Telegraph.co.uk. Had the government listened to Ed Balls and his supporters and not formulated a tough plan for the deficit, “the likely consequence would have been faster and deeper cuts… forced upon us by markets in a panic”.
Today, the government’s medium-term growth projections look over-optimistic. But borrowing even more – as ‘Plan B’, or watering down austerity, implies – won’t address this problem, said Lilico: key factors crimping growth are the country’s public and private debt load, and huge public sector. We need to reduce these as fast as possible, not make them worse by borrowing more. So forget plan B.