As soon as the International Monetary Fund raised its hand and admitted: OK folks, we were wrong, the UK is not heading for a recession this year, Chancellor Jeremy Hunt says he doesn’t mind a recession if it is necessary to get inflation down. .
Like economic self-harm, it doesn’t get better (or, more accurately, it gets worse).
Why would companies, domestic or foreign, invest in Britain if even the chancellor is indifferent to the prospect of a recession before the end of the year? Why expand your operations when the man in charge of the economy is comfortable with contraction?
It is true that, compared to other major market economies in the world (known as the G7), British inflation remains stubbornly high.
It finally fell below 10 percent to 8.7 percent last month, but the drop was less than expected, food inflation remains painfully high and, most worrying of all, core inflation (which excludes prices subject to short-term volatility) actually increased. from 6.2 percent in March to 6.8 percent in April.
Chancellor Jeremy Hunt (pictured) says he doesn’t mind a recession if it’s necessary to reduce inflation
It is true that, compared to other major market economies in the world (known as the G7), British inflation remains stubbornly high. Leaders in the G7 photo
British inflation is the highest in the G7, well above Japan (3.5%), Canada (4.4%), the United States (4.9%) and France (5.9%).
Only Italy comes close to 8.2 percent, although the eurozone average is 7 percent, which isn’t much better than us.
Even Germany, historically averse to inflation, is at 7.2 percent, despite the fact that its economy is now in recession, unlike Britain.
But maybe the IMF was premature about us avoiding recession.
Its review came ahead of misguided remarks by the Chancellor yesterday, which prompted the Bank of England to raise interest rates whatever was necessary to force inflation down.
There are already enough people on the Bank’s Monetary Policy Committee (which sets the base rate) who think the only way to curb inflation is to depress economic activity with higher rates without further stimulus from the Chancellor.
Frankly, it’s madhouse economics. Yes, interest rates will likely have to rise again from the Bank’s current benchmark rate of 4.5 percent because inflation is proving more persistent than most commentators (myself included) thought.
But do we really want them to go as high as 5.5 percent, as the markets are now anticipating? That would be catastrophic for people with mortgages and small businesses with loans.
Chancellor of the Exchequer Jeremy Hunt speaking at the British Chambers of Commerce annual global conference, at the QEII Centre, London on May 17.
Hunt would have his recession then, all right. His fiscal position would also take a hit as falling tax revenues, loan defaults and breakneck spending (with more people receiving benefits) resulted in huge year-end budget deficits.
Not exactly the kind of cheap look you want with less than 12 months to go until the general election.
The Conservatives could also hand over the keys to 10 Downing Street to Keir Starmer without bothering to fight.
It would be self-inflicted nonsense, proving beyond fluke that the Tories had lost their way when it came to managing the economy.
Yes, UK inflation is agonizingly slow to fall. But it’s falling. This month will see another drop and that should continue through the summer into the fall.
It’s still possible that inflation will be below 5 percent before the end of the year (although the fact that the error-prone Bank Governor also thinks so means I might start to doubt my own judgment). .
Rishi Sunak has promised that it will be below 5 per cent by Christmas. Do you really want to ruin the economy just to make sure you keep your promise? Does it really matter if it doesn’t drop below 5 percent until next January or February and hits 3 percent or below until next Easter? Is any of that worth a recession?
If that’s the thinking at 10 and 11 Downing Street, then it’s political madness. The Prime Minister should never have promised inflation below 5 percent in the first place. Neither he nor his government controls inflation.
Rishi Sunak has promised that inflation will be below 5% by Christmas
The reason it finally fell from more than 10 percent to less than 9 percent last month is because, after the rise in energy prices that followed the Russian invasion of Ukraine, gas prices and the electricity began to decline. That has nothing to do with the UK government.
The sharp falls in wholesale energy prices will continue to be reflected in the decrease in household gas and electricity bills during the summer. Again, nothing to do with the Government.
The institution in charge of fighting inflation is the Bank of England, which is independent of the government.
It’s only right that you have this job because you bear much of the responsibility for inflation being so high in the first place.
It pumped too much money into the economy during the pandemic, especially since it was on top of the tens of billions it had printed over the previous decade after the Great Crash of 2008.
He insisted that the inflation created by the pandemic’s disruption to global supply chains, followed by the war in Ukraine, was merely “transient” when it was obviously taking root in economies across the Western world.
That meant it was slow to raise interest rates to combat inflation and was forced to accelerate some major, disruptive hikes when it finally saw the light of day.
But just because you were slow to raise rates when inflation first hit doesn’t mean you should exaggerate increases now.
That is the message that the Prime Minister and the Chancellor should convey to the Bank, even if it is behind closed doors.
Maybe it is. But I doubt it, because it would make the Chancellor’s public clamor for higher rates even more incomprehensible.
There is one area in which the government has a direct anti-inflationary responsibility: holding the line in the face of public sector wage demands that would lead to a spiral of wages and prices. So far, the Government has made a reasonable fist about it.
Yes, there have been some pretty high settlements. But given the way real wages have fallen since the Big Crash, there had to be some flexibility in the system. I don’t see inflationary wage increases being incorporated across the board.
Some economists argue that, in the end, wage increases don’t create inflation, only excessive money issuance does (which is why we end up with double-digit inflation in the first place).
To them I say this: fair enough, I don’t necessarily accept your monetarist doctrine, but if you’re right, then there’s nothing to worry about: all the major measures of money supply are now very tight, so with a lag, due to the inflation of its lights it will soon drop fast anyway. Ipso facto, there is no need to exaggerate interest rate hikes.
Just because the government has limited weapons to fight inflation doesn’t mean it should do nothing.
Britain has had the slowest post-pandemic return to work of any major European economy.
The workforce is even smaller than it was before the pandemic. Unemployment is below 4 percent, but 12 percent of the working-age population is out of work and not looking for work, despite more than a million job openings.
More than 2.6 million now receive long-term sickness benefits, 440,000 more than before the pandemic.
This slows economic growth because businesses can’t fill vacancies, increases public spending because the benefit bill rises, and even fuels inflation by increasing the cost of labor.
The Sunak administration’s response to all of this has been wholly inadequate. It can only be resolved with a massive welfare-to-work program, of which there are no signs.
Instead, the government has decided to rely on record net migration to cover labor shortages.
Which is a shame because, while a vibrant economy will always require a considerable degree of net migration, it is welfare work that would really stimulate economic growth.
And without growth, there’s little chance Sunak-Hunt can afford a tax cut budget next spring, which means little hope of re-election in the fall of 2024 (now my best guess of when the election will be).
This week, ministers raved about the IMF’s upward revision of our growth outlook for this year, despite only projecting a paltry 0.4 percent.
More worrisome was the IMF’s forecast of growth of just 1% next year. That would be pathetic.
Instead of relaxing with the recession, Sunak-Hunt should unleash the animal spirits of economic growth.
Without it, all that calls for them and their government is political oblivion.