Bad News for the UK from the OECD

The OECD have today warned that the UK economy will contract marginally in Q4 of this year (by some 0.1%) and will further fall in Q1 2012 (by 0.6%) and so enter a second period of recession.  See OECD predicts recession for more details.

Clearly the Ezone crisis will have a decisive role in the OECD downgrade, but it is also clear that the Chancellor has been following a high risk policy approach at a time when high risks are to be avoided.  His main risk is of front loading spending cuts during the Parliament as the central plank of his fiscal consolidation plan.   At a time when the private sector has been finding it hard to regain its growth momentum, the huge cuts in public spending are expecting businesses to find even more ways to expand to make up for the cuts.  Not only do they need to find sales to make up for what they lost in the recession, they have to make good the loss of spending power in the economy driven by spending cuts.

Should this come as a shock that has been brought on by feckless management of the EZone crisis?  Well, not really.


A prominent economist - Professor David Blanchflower -  articulated the issues well just recently.  See what he had to say in an interview last June of Sky News

And that wasn't the first time he made the same warning.  In May he made the same points at a business conference in Edinburgh:  click here to see the article

Many others have given the same warnings over the last year from Paul Krugman to MPC member Adam Posen.

Now it seems to me that there are at least three reasons for implementing such savage cuts in such a manner.  The first is to stabilise the Government's debts levels and demonstrate the 'we have a plan' to the markets.  Clearly, a plan is needed.  Consolidation is needed.  The Chancellor's difficulty is that having established such a tough consolidation plan he must stick to it.  He's made his bed and the economy has to lie in it.

Secondly, a rapid reduction plan is part of a policy of 're-balancing' the economy: in this case it means re-balancing it away from public sector towards more private sector activity in areas such as health, education and social welfare.  Thirdly, it is presumably also a policy approach that gets the bad news out of the way as quickly in possible so that some growth might return in time for the next election.

It is my fear that a heady mix of political pragmatism and ideological fervour are driving the economy along a series of mountain top hair pin bends far too fast.  We might arrive safely at our destination.  Indeed we might, but we are taking far too many avoidable risks along the way.