Economy is still severely wounded

Friday 7 September 2012

GEORGE Osborne knew he could rely on a more polite reception at the CBI dinner in Glasgow last night than the one he received from the crowd that booed him at the London Paralympics on Monday.

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But even among those he could largely count on as political allies, he was stretching credulity with the extraordinary claim that "our economy is healing". Where is his evidence?

Earlier in the day the OECD had revised its growth prediction for the UK this year from plus 0.5% to minus 0.7%. That is even more pessimistic than forecasts from the IMF and the Bank of England.

"Nobody is offering a credible or convincing alternative economic strategy," Mr Osborne told diners. That is not quite true either. As it happens, five prominent academics, including Professor David Blanchflower, a former member of the Bank of England monetary policy committee, dispatched an open letter yesterday, observing that by bringing forward capital spending on infrastructure, Scotland escaped the worst ravages of the 2008 recession. The lesson is that the Chancellor could spread the benefits of low UK interest rates with a major stimulus package for the UK economy. Mr Osborne supported his "healing" claim with the following list: "Jobs are being created, manufacturing and exports have grown as a share of our economy, our trade with the emerging world is soaring, inflation is down, much of the necessary deleveraging in our banking system has been achieved and the world is once again investing in Britain."Deconstruct that list and most of it amounts to very little. Jobs are being created but new jobs are predominantly short-term, part-time or low-paid (often all three), compared with the thousands of permanent full-time public sector posts being lost. Manufacturing and exports have grown as a share of our economy but only because other areas of the economy, particularly construction, have shrunk at an alarming rate. Inflation is down because the economy is flat on its back. And, though the banks have indeed deleveraged, they are so fixated on fixing their balance sheets that successive Government schemes aimed at kickstarting bank lending have failed miserably. The stark truth is that loose talk from Mr Osborne and others about the danger of a UK sovereign debt crisis sucked confidence out of the economy in 2010 and it has not returned. In addition a succession of banking scandals has jeopardised banks' relationships with their clients. Both domestic and business customers no longer believe their banks will not sell them a pig in a poke. As Antonio Horta-Osorio, chief executive of Lloyds Banking Group admitted in his speech at the same dinner last night, a lack of trust in banks undermines their role in the economy, adding that a healthy banking industry can sustain a virtuous circle of business growth, job, creation and wealth creation. The same applies to the right sort of government economic policy. On both counts, the UK has a very long way to go.

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Finance

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Economy is still severely wounded

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