The political-media establishment’s obsession with News International is distracting us from a worrying fact - that our economic prospects are deteriorating. Take these developments:
- The IMF has warned (pdf) that the euro area’s debt crisis has “potentially large spillovers” to the rest of the world economy.
- Germany’s ZEW indicator has fallen sharply, signalling that the country’s economic growth will slow markedly.
- Governments in developed economies next year will engage in the largest concerted fiscal tightening for 30 years. There’s not much chance of this being expansionary.
- Yesterday’s results show that in the last nine months, Apple spent more on building up cash and bond holdings than it did on R&D. This is a microcosm of a widespread fact in western economies - that a dearth of investment opportunities is causing firms to prefer to hoard cash, even at nugatory interest rates, than to invest in real activity.
Yes, these are facts about the world economy, not mere local ones. But they matter for us in two ways. The obvious one is that they threaten to depress our exports. The less obvious is that these global clouds are adding to UK firms’ reasons not to invest. All this matters because, with public and consumer spending going nowhere, exports and investment are our only hopes for growth. And these hopes are dimming.
It’s no wonder, then, that today’s minutes (pdf) show that the MPC thought:
It was likely that the current weakness in activity would persist for longer than previously thought…recent developments had reduced the likelihood that a tightening in policy would be warranted in the near term.
Markets share this view. One reason why real government borrowing costs are at a record low is that pessimism about growth has caused investors to pile into government bonds.
Now, granted, there are reasons for optimism; the adverse effect of the parts shortages created by Japan’s earthquake should wane, boosting output in coming months; the recent fall in oil prices has raised real incomes (of firms, not just households); and emerging markets should grow well. However, the UK is badly placed to benefit from the latter; last year, we exported more to Spain and Italy than we did to the BRIC countries.
The real problem for George Osborne is not that he’s being sucked into the “hackgate” scandal. It’s that it looks increasingly as though now is a bad time to be tightening fiscal policy.