The past few days have brought more mildly encouraging data. Employment rose last quarter and is now close to its pre-recession peak. The trade deficit narrowed sharply in July as exports jumped by 9.3% on the month. The annual rate of consumer price inflation (CPI) edged down to 2.5% in August from 2.6% in July. Recent retail sales and service sector activity data have also surprised on the upside.
Norman Lamont was mocked for seeing ‘green shoots’ in the early 1990s, yet the statistics proved him right later, noted former prime minister Sir John Major. He stuck his neck out and said he thinks we’re on “a slow road to recovery”.
What the commentators said
The Bank of England expects inflation to fall back to the 2% target by the end of the year. But the trouble with the Bank’s “rosy view… is that global pressures are pushing hard in the wrong direction”, said James Moore in The Independent. A lousy harvest in the US will boost food prices; oil has risen rapidly; and utility firms “are rumbling about hiking prices again”.
The squeeze on consumers may have lessened as inflation has declined. But with prices unlikely to fall much further and earnings still only rising at 1.5% a year, it endures. That will “dampen consumer spending”, which accounts for over half of GDP, and “limit the economy’s potential for recovery”, added Chris Williamson of Markit.
The Bank of England may well opt for even more money printing soon, but as it has had scant impact on growth so far, it is hardly likely to prove a miracle cure this time. It also increases the danger of inflation. So while the economy may no longer be shrinking, “it is hard to see [it] emerging from its torpor very soon”, said Larry Elliott in The Guardian.
That in turn means that the budget deficit will not fall as quickly as anticipated. Indeed, this year spending has been running ahead of last year. So a core coalition pledge – to see the overall national debt pile begin to fall by the end of this parliament – looks “as good as dead”, said Jeremy Warner on Telegraph.co.uk.
But chancellor George Osborne should resist the temptation to fudge or water down his plans, as that would shred the government’s credibility. That implies cutting spending further than planned over the next three years. “So be it – it’s what’s needed for the economy’s long-term health anyway.”