In Focus: Supply reforms demanded
I chaired a round table this week on emerging markets, and one statistic really jumped out at me: the fact that the Chinese economy is set to grow by 7 per cent for the next 15 years, by which time it will have overtaken the US as the world’s largest economy.
This is the sort of news that puts the recession in the developed countries into perspective. In its latest UK economic outlook published today, the Institute of Directors forecasts UK GDP growth will be just 1.2 per cent in 2011. This is unchanged from its previous quarterly forecast in November 2010.
The IoD reports that five economic influences will combine together to weaken GDP growth prospects this year: falling household real income; a flat savings ratio; upward interest rate expectations; the fiscal squeeze and anaemic broad money supply growth.
However, the IoD does not think the Chancellor needs to resort to a Plan B (slowing the spending squeeze). Instead it supports the development of a parallel plan to the Spending Review, which focuses on significant supply-side reforms to the UK economy.
The IoD says that if the Chancellor was to slow the reduction in public spending, it would be more damaging to GDP growth than maintaining the current course, owing to the negative impact on financial markets and business confidence.
Ron Lynch, East Midlands regional director for the IoD, said: “In 2011-12 we think there is more of a risk to the economy from a mistake in monetary than fiscal policy. Raising interest rates when the money supply is so weak could undermine recovery and risks a double-dip.
“It is concerning that all the attention at present is on the risk to the economy from a mistake in fiscal policy and the challenge to the Monetary Policy Committee’s credibility from the acceleration in inflation. This tends to lead to calls to slow the spending squeeze and speed-up interest rate rises – somewhat contradictory.
“We take the opposite approach. The spending squeeze should proceed as planned and the MPC should avoid raising interest rates. In fact, broad money supply statistics suggest there is a case for an extension in quantitative easing if anaemic monetary growth continues.”
Whilst I can’t say I agree with what Lynch says about continuing the cuts to the public sector, it’s interesting to hear him thinking of new, different ways out of the malaise.
Whether George Osborne will be as brave in his crucial (and we’re beginning to forget when they weren’t crucial) Budget remains to be seen. History would tell us that he’s laid his cards on the table, and he’s prepared to sit this one out. However, Lynch’s approach, whilst partly fishy, remains as viable option as any out there are the moment.
Or we could all move to China…
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