Political parties are positioning obviously for the UK Election. Political leaders know they have to find something more inspiring than an offer of years of austerity and disillusion.
It is a tough call. The economy shrank by 5% last year, the biggest fall since the Great Depression. The contraction over the six quarters of the recession was 6.2%. That peak-to-trough decline was less severe than in Japan, Germany and Italy, but the recession lasted longer in the UK than in any other G7 economy.
The Treasury’s projection of 1.25% growth this year seems reasonable. But its prediction of 3.25% in 2011 looks over-optimistic and I thought it would be useful to analyse. Ever the optimist, the IMF is forecasting 2.7%. But the latest survey of independent forecasts assembled by the Treasury found that they were expecting, on average, growth of 2% next year. The Bank of England has held the base rate at 0.5% since March 2009 and has injected £200 billion into the economy by purchasing assets with central-bank money.
As Robert Chote, director of the Institute for Fiscal Studies, said: “The government expects public spending in total to be broadly flat in real terms over the four years beyond 2010-11. Making plausible assumptions ... Whitehall spending on public services and administration would need to fall by an average of 3.1 per cent a year over those four years, a cumulative decline of 11.9 per cent or £46bn in real terms by 2014-15. This implies cuts averaging between 5.3 per cent a year and 7.1 per cent in the areas that the government is not planning to ‘protect’ in 2011-12 and 2012-13.”
The assumptions that underlie those forecasts, can be found in the economy section of yesterday’s Budget “red book”.
As you can see, a very sizeable proportion of the economic growth the Treasury foresees for 2011 and 2012 comes from improvements in net trade – or some 0.75 percentage points from growth of 3.25 per cent and 3.5 per cent respectively. The explanation given is the following: “The past depreciation of sterling and the recovery in world demand provide the conditions for the rebalancing of demand between domestic and external sources and so net trade is forecast to contribute a further ¾ percentage points to GDP growth in 2011 and 2012. This is broadly in line with the positive contribution seen in 1994 and 1995, following a sterling depreciation of 18 per cent, less than the 25 per cent depreciation seen since July 2007″.
Commentators are struggling to see the upbeat views on net trade. A lot more external demand will be needed, the eurozone is by far Britain’s biggest trading partner. All eurozone countries are adopting similar policies. Most like Germany are looking at Eastern Europe. We hope the Treasury is right and that Government gets behind our exporters to to get to markets that they need.