Has George Osborne stopped beating up the economy? Certainly many are nervously relieved at having evaded the big stick he waved earlier. Others have noted that he was helped in his more benevolent approach by optimistic forecasts from the Office of Budget Responsibility (OBR).
Despite this apparent benevolence, the Chancellor still plans to cut public spending and increase taxes. The OBR forecasts that “fiscal consolidation (will) continue to depress the level of GDP, while acting as less of a drag on growth over the past four years.” (OBR)
However even this bit of cheer is predicated on the global economy expanding, and inflation rising. While we can speculate that the additional stimulus applied to the private property sector may cause asset prices to rise (if house builders are confident of selling new properties at a profit, and do build) the fall in CPI has far more to do with weak domestic and global demand.
The OBR would have us believe that falls in consumer prices mainly reflect “falls in commodity prices”. But falling commodity prices reflect weak global demand or spare capacity, and take the form of gluts and rises in inventories.
These have intensified deflationary pressures globally, but also in the euro area. Into this depressed world where economic contraction or ‘austerity’ is widespread, the OBR expects “UK export markets to grow by 4.1% in 2015” – higher than their July forecast. This seems somewhat optimistic.
While the OBR recognizes the UK household sector as the largest source of income and spending in the UK economy, it also expects households to save, and deleverage debt to 163% of disposable income.
This process will surely depress consumption, yet household debt will still be amongst the highest levels in the world (and because of deflation will rise in real terms) while real rates of interest on that debt are expected to rise.
And all of the OBR’s optimism is predicated on global deflationary pressures easing. As the experience of the steel industry has shown, deflationary pressures can close down whole industries and their related sectors, raising unemployment and drastically depressing affected household income and spending. Steel will not be the only industry to be damaged by falling prices. More dominoes are due to fall.
The reasons are straightforward: the global financial crisis has not ended. On the contrary having moved from the core – the UK and US– in 2007-9, the crisis then transferred to the Eurozone, where it is ongoing. Emerging markets centred on China are now at the epicenter of the third phase of this apparently unending crisis. The ending of monetary stimulus in the US and fiscal contraction in important western economies has weakened demand globally, and led to a build-up of gluts in emerging markets and consequent falls in commodity prices.
At the same time there is no sign that the policies that inform the dominant debt-deflationary economic model in the UK and in most of the OECD economies – are changing.
It is therefore unlikely that the British economy will be insulated from a global crisis that this Chancellor’s fiscal consolidation has made worse. He now intends, without any real changes to his economic model, to make Britain’s contribution to weakening global demand less bad.