Subdued growth figures stoke UK uncertainty

Amid all the doom-mongering by opposition and claims by the government that its policies have been vindicated, the economic situation remains uncertain, though coming months could be crucial

The debate over how to deal with Britain’s deficit can be confusing at times, particularly just after the release of important economic figures.

The mantra of the coalition government is that Britain’s finances are in an awful mess following the ravages of the Labour government and that the priority during this parliament must be to cut the deficit. If not, we could lose our treasured AAA sovereign debt rating and end up with sky-high bond yields (the amount investors demand to hold a country’s debt) comparable to those of Greece.

But the Labour opposition argues that the obsession with cutting the deficit risks holding back economic growth. The confusion arises from claims by supporters of this view that slow economic growth caused by over-zealous cutting could itself result in the loss of our AAA rating, so, paradoxically, we could become more indebted by paying back our debts too quickly.

Latest economic growth figures of 0.2% for the second quarter were seized on by both sides of the debate.

“The positive news is that the British economy is continuing to grow and is creating jobs,” was the response of chancellor George Osborne.

Unsurprisingly though, shadow chancellor Ed Balls’s take was different.

“These figures show that last year’s recovery has been recklessly choked off by George Osborne’s VAT rise and spending review,” he said.

“The economy has effectively flatlined for nine months and this is very bad news for jobs, living standards, business investment and for getting the deficit down.”

The shadow chancellor’s comments may be over the top, but George Osborne’s sleep may not be completely undisturbed. Some economists are predicting that weak growth in the third quarter poses a risk for the UK’s sovereign rating.

Interestingly, the intense debate over the government’s deficit-cutting strategy comes before it even gets underway in earnest. Most of the effect the government’s plans have had has been on confidence and future projections. However, while the government may wish it had done things differently since winning the election last year, we are unlikely to see any sharp change in direction – a U-turn itself would also be likely to undermine confidence. Despite voicing their concerns over growth, economists also advise the government to stay the course.

So Osborne has so far been batting away calls to revert to a Plan B. Possible moves to boost the economy in the short-term include welfare payments to inject money into the economy and another round of quantitative easing.

The government’s line is that the current austerity measures will result in short-term pain that will soon give way to longer-term gain. (Cynics say the pain is expected to end just in time to give the recovery a decent run ahead of the next general election).

The government’s strategy faces a crucial few months. If it can continue with its broad deficit-cutting strategy without incurring the ire of the ratings agencies, perhaps the sunlit uplands are not too far off. If not, it may be time for plan B. A lot will depend on how well the economy grows in the third quarter.