Remember the economy?

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.

Comments

[Howard Reed]

A salutary post, Chris - it's amazing that with all the technology available at the fingertips of those running the media, they seem unable to focus on more than one story at a time. And it's a huge problem in fact, because it means bad news gets buried so often...

By the way I just wanted to say - fantastic blog.

[www.facebook.com/profile.php?id=634170297]

While I agree with this post, you seem to be disagreeing with one of your own general themes here Chris. Are you saying that any of the people who could be doing things about this aren't doing so because they're moaning about Murdoch?

[chris]

@ Howard - thanks.
@ Paul - I wasn't making any such big claim, just saying that if the TV and radio news consists of 20-25 mins of hackgate, there's not much time or audience attention left for other matters.

[gastro george]

Cutting public expenditure leads to reduced demand leads to stagnation/depression. Who would've thought it?

[Mr Jelly]

"The political-media establishment’s obsession with News International is distracting us from a worrying fact - that our economic prospects are deteriorating."

No. It. Isn't.

Wot Paulie said.

[John H]

Maybe it's no bad thing if attention is distracted from the world economy. There's not very much we can do about it (in contrast, perhaps, to Hackgate), and the resulting powerlessness and passivity plays into the government's hands.

But if you're right that this is a bad time to be tightening fiscal policy, at what point do you think this will be made apparent to Osborne in the only language he acknowledges - that of the markets? Up to now his trump card has been that the markets are supporting (and, indeed, demanding) the government's current course. Is that likely to change, and if so, when?

[Rob Marchant]

Chris, I posted yesterday and today on a similar theme: while hackgate is diverting everyone, Europe is burning.

http://thecentreleft.blogspot.com/2011/07/britain-convulses-but-europe-burns.html.

[anon]

Tightening fiscal policy may actually be the right answer, because UK govt spending has grown steadily during the New Labor years and is likely excessive. Yes, it's "contractionary", but that's why the Bank of England should offset the contraction with QE. Here's hoping they don't get cold feet--they've actually been a bit too lax on the inflation front for some time.

[Sirenofbrixton]

Let's not forget that the Murdoch media's influence on politics here & in the US is responsible for a whole lot of the destructive neo-con ideologies taking root in economic policy. Murdoch loved Brown, even said so in the select committee hearing, because Brown fell into line with his beliefs about the banks. The two issues are not so separate: bringing the media into line might help us have sensible economic policies

The govt are also using the scandal to hide the push on it's in ideological agenda -Osborne's famous 'there is no plan b' approach.