What are we to make of the UK’s higher than expected 1.1% growth in the last quarter?
Not too much. It is a one-off combination of a slight rise in confidence as a result of having a new government and the economic effects of the high spending policies of the previous government.
Neither will last. The high spending was always going to end after the General Election, irrespective of who won, and the novelty of having a new government will soon wear out when the spending ends and the cuts begin. There is no doubt that those cuts are necessary – indeed, long overdue – but they are going to hurt, and they are going to hurt business more than most. Many businesses rely on government contracts, and civil servants will cut outside contract before they cut their own numbers or salaries. Even businesses with no government contracts will see their overall markets contract.
Added to this is the weakness of the EU as a whole identified in a recent IMF report. This is the culmination of problems that have been building up for years – over-regulation of business, pension obligations, structural deficits, and all the other “usual suspects”. Some have been warning about these for years, but those in power have laughed at them and simply borrowed more money. Now the bill collectors are at the door.
Although the UK is guilty of some of the same economic crimes, Britain is not as badly exposed as some other EU states – at least not yet. The more immediate danger for British businesses is that their European markets may be contracting at the same time as their domestic markets.
However, we should not be too gloomy. The dreaded “double dip” recession still seems unlikely. Yet the fact that the Bank of England predicts that interest rates will remain low for some time is hardly a sign of confidence.
Things are never as bad as they seem – but they are never as good as they seem either.