British Economy Faces 3 Very Different Futures
UK- London | Aug 19 2012 | (23:18:42 - EDT)
Inflation has been almost continuously above target since 2008, while the spending cuts scheduled are more sustained than any developed country has ever delivered. What’s more, there is no end in sight.
The glass half full view observes that things could have been a lot worse. Britain’s bust banks were about as large, relative to the economy, as Ireland’s or Spain’s, yet we haven’t been driven to seek an international bail-out.
Despite planning a 12pc of GDP budget deficit, bond markets have not lost faith. Deflation didn’t get out of control. Unemployment has stayed modest. And, while there’s been a double dip, it’s only a small one so far.
What next from here? Relatively few economists were forecasting a double dip in 2010. Those who did expected the second dip to be quicker and sharper and that by now we would be in a recovery phase. I was a “triple dipper”, forecasting that by now we would be in an unsustainable policy-driven recovery, induced by panicky money-printing in 2010 in response to the second dip – which didn’t happen until 2011 – with a third dip to come.
The fundamentals of my view remain the same. There are really three paths from here. It’s possible that the Government’s optimistic notion that sustainable growth is just around the corner is correct, and pessimism about bust banks, collapsing euros, a drop in productivity growth and so on will prove misplaced. If that’s right, growth can accelerate and inflation moderate and Osborne and King be proclaimed heroes. I give that a one-in-10 probability.
The second path is the darkest – the only way is down. Perhaps the euro will collapse in a disorderly fashion, bringing down the banks and the UK sovereign with them, inducing a further 5pc to 10pc drop in GDP.
Or maybe matters will be more drawn out, with a gradual snowball of defaults on UK mortgages as GDP and wage growth never get going enough for debts to be serviced, inflation keeps eating away real wages, and people lose hope. Such defaults could bring down the UK banks, even if the euro doesn’t collapse.
Or perhaps the political will to maintain the Government’s deficit reduction plan dies, there is more backsliding on them than we’ve seen so far and bond markets lose patience, with a UK gilts spike. Whatever the mechanism, this scenario would be very grim. I attach a 35pc probability to this.
Source: Andrew Lilico, The Telegraph
Get up to date news just for Finance!(Looking for special offers or news in all categories? Try our General newsletter!)
- The New Classic: Julia Belanoff
- HWKN’s Project: Winner of Young Architects Program
- Custo Barcelona Presents X-ray at NY Fashion Week
- 10 Interesting Concepts Revealed at NY Auto Show
- C'est Magnifique! Paris Couture by Chanel
- Lower Blood Pressure & Reverse Age with Marine-D3
- Annuity Harmony: Helping You Plan for Retirement