Actions have consequences

There will be a brief hiatus in blogging for the next few days as I head off to Poland for some family schmoozing.  Joy of joys, we shall be flying through Heathrow, so I'm already having palpitations at the thought of coming home to face the fearsome queues that are now a daily feature of the LHR experience, thanks to a shortage of staff at the UK Border Agency.  

Big queues at Heathrow immigration desks are nothing new. A few years ago I came into Terminal 4 in the early morning from Amsterdam. No more than a 40 minute flight, but it saw us arriving in the midst of all the overnight flights from North America, Africa and Asia.  I made it through reasonably quickly, but my Australian colleague was there for a lot longer.  How much longer? Well, I took the train to Paddington, waited for a taxi, went across town to the City, lined up for a latte at Starbucks and then went into the office.  Once at my desk, I called his mobile, and he was just reaching the front of the immigration queue!  

The difference now is that the line-ups seem to be a direct result of government cutbacks: thanks to budget reductions at the Border Agency, there are simply not enough staff to open all of the immigration desks.  You have to wonder if anyone in the government is pondering what this means.  All the rhetoric a couple of years ago was about how wasteful spending would be cut and "frontline services" protected, yet here we have a simple example of how reduced spending translates directly into degraded service -- and with the Olympics just three months away, this could scarcely be happening at a more embarrassing time for the government, or for the country.

Motoring organisations have moaned for years about how the amount spent on roads is a small fraction of the amount the government collects in license fees and fuel taxes.  Something of the same thing now seems to be happening with air travel.  The UK has the highest airline passenger fees in the world, yet the amount spent on ensuring that the experience of travelling through British airports is at least tolerable is shrinking steadily.  There are lots of good reasons why driving and flying should bear a disproportionate tax burden; however, conservatives more than other politicians should be alive to the danger of voters seeing a growing disconnect between what they pay for and what they actually get in return.        

When GDP's in a hole, start digging

It's been a tough week for those who try to forecast the economy, or at least for me specifically.  As I noted just yesterday, the UK's budget deficit for the 2011/12 fiscal year turned out to be exactly in line with the budget projection and not,  as I predicted a month or two ago,   significantly lower.  And today we learn that real GDP fell 0.2% in Q1 of this year, belying widespread expectations of a marginal increase.  It's a good thing I don't get paid to do this sort of thing any more (or perhaps I should say, this may be why I don't get paid to do this any more).

The latest fall in GDP, coming on the heels of a 0.3% fall in the final quarter of 2011, means that the UK has slipped back into the much-feared, and even more hyped, "double dip recession".  There's a reasonable summary of the data, plus analysis from Stephanie Flanders, in the BBC story here.  Ms Flanders makes the worthwhile point that even if the Q1 number had turned out to be marginally positive, it wouldn't really have changed what most people already know: the UK economy is bumping along the bottom, and it's not clear where fresh growth momentum will come from. Real GDP is now slightly below its late 2010 level, and still 4% lower than it was before the financial crisis hit.  This sort of "recovery" is simply without precedent.

So, at the risk of sounding like the tabloids, what is the government going to do about it?  Not much, it would appear.  David Cameron called the data "very, very disappointing", but said there could be no change of course.  Austerity rules, OK?  Indeed, as I noted yesterday, the Treasury has just asked government departments to identify a further 5% in spending cuts in order to ensure that deficit reduction plans don't go off course.

It's very likely that these further cuts will come from public sector investment spending, rather than current outlays.  However,  the Q1 GDP data strongly suggest that this would be wildly wrong-headed.   The main culprit in the weakness in Q1 was a 3% fall in construction spending, which cannot be unrelated to the sharp decline in public sector investment as the austerity programme bites: as I pointed out yesterday, central government investment outlays fell 40% in the fiscal year just ended.  (One specific culprit for Q1 may be the Olympic park project. All of the major construction activities there have been completed in recent months, leaving only cosmetic works to be carried out before the Games begin in July).

The accuracy of the ONS data on construction has been called into question in the past, and indeed this latest surprise fall in GDP has led some analysts to question the reliability of the national accounts data more generally.  Still, even if the data are not precisely correct --and they're not -- it's surely important to acknowledge Stephanie Flanders's point: we all know the economy is just bumping along, going nowhere.

As I've said here more than once,  it was recognised long before Keynes came along that recessionary times were an ideal opportunity to carry out big projects.  Or to put it another way, when the economy's in a hole, start digging!  Think Dave and George are listening?      

UK fiscal data: nothing to like

The ONS released public sector revenue, spending and borrowing data for March, and for the 2011/12 fiscal year, earlier today.  The official release predictably focuses on the fact that borrowing for the full year, at just under £126 billion, was in line with budget targets, but if you look even a little way behind the headline, there's very little to like in the underlying data, regardless of where you sit on the political spectrum.

Even that headline number itself is a bit of a disappointment. A couple of months ago, the year-to-date deficit was tracking so far below the target that a few commentators, your humble blogger not excepted, ventured to suggest that the full-year figure would be as much as £10 billion below budget.  However, the shortfalls ballooned in February and March, which could be a very ominous development if it means -- and it probably does -- that signs of slower GDP growth in recent months are taking a toll on the public finances.

Looking at the revenue and spending data, a couple of things stand out.  First, most of the burden of cutting the deficit is still being borne by taxpayers.  Central government revenues rose 4% for the full fiscal year;  public spending, supposedly subject to a vicious squeeze, also posted a 2.0% INCREASE!   Net social benefits, cut to the bone and beyond if the pleadings of special interest groups are to be believed, actually rose by 4.9%.  Interest payments on the debt also rose, somewhat surprising in light of the Bank of England's strenuous attempts to keep borrowing costs down.  The only category of spending to decline was, alas,  net investment, which fell 40% (!) year-on-year, and is now 60% (!!) down from its all-time peak, set just a couple of years ago.

Even before these numbers appeared, the Government had announced that the Treasury was putting pressure on spending departments to find another 5% in expenditure cuts.  It's all to likely that the bulk of these will again come from investment spending, which is the last thing the economy needs,  from either a long-term or short-term viewpoint.

Tomorrow sees the release of Q1 GDP data, which are expected to show that the economy eked out at best a marginal gain for the quarter.  But even if the feared "double dip" has been avoided, most commentators are likely to revise their forecasts for the full year downwards yet again, citing the economy's lack of momentum, the renewed problems in the Eurozone, and one-off factors like the Queen's jubilee. Taken together, the fiscal and GDP data are likely to make Labour's Ed Balls think Christmas has come really early for him this year.  He's likely to do a clog dance all over the Government, and it would be hard to deny him that right.      

Spring hopes eternal

How's the "Arab Spring" looking to you right now?  Let's go through a quick checklist:

* Tunisia, where it all kicked off in early 2011: peaceful now, but in dire economic straits because the tourists, the lifeblood of the economy, have continued to stay away.

* Egypt: also in economic difficulties because of a lack of tourists.  There are growing suspicions among Egyptians that not much has really changed, as a large number of candidates for the upcoming Presidential elections have been disqualified on the flimsiest of pretexts.

* Libya: off the front pages, but the militias that brought down Col.Gadhaffi are still in place, and there are sporadic reports of revenge killings and torture.  Still, the oil came back on stream faster than expected, so that's OK, right?

* Syria: civil war in all but name.  It became apparent in the early days of the uprising that the opposition was so splintered that it would be nearly impossible to reach a political solution, even if the Assad regime were to make meaningful concessions.  It's hard to see how the underlying issues can be resolved, even assuming that the UN-brokered ceasefire holds.

It's a depressing list.  In none of these countries (Libya possibly excepted)  have things panned out as the locals wanted, or as their supporters and well-wishers around the world hoped.  It's still early days, of course, but few would wager that any of these countries will be functioning, pluralistic democracies five or ten years hence.

Which brings us to Bahrain.  I visited the country a dozen years ago, during a business trip around the Gulf.  One of the clients I met was a UK expat who had lived there for almost twenty years.  In all that time, he had never once popped across the King Fahad Causeway to take a peek at Saudi Arabia.  Bahrain was just too congenial.  And it was clear at the time that many Saudis agreed.  Right at the Bahrain end of the Causeway was (and is) a large shopping mall, full of fleshly temptations (and a Marks and Spencer store!), sited there to cash in on all the young Saudis who streamed across each weekend for a little relaxation. This is the largely pro-Western and liberal country now being excoriated in the world's media for its allegedly repressive regime.

The self-styled "great powers" have been trying to shape the course of events in the Middle East ever since the "Great Game" and the Sykes-Picot Agreement.  However,  outsiders' dealings in the region are still beset by ignorance of what the place is actually like.  As a result,  it's hard to know, in any given situation,  who  will wind up supporting whom against whom.  In Bahrain, the ruling family are Sunni Muslims, but a large proportion of the population are Shiites, and it's the latter who are involved in the current unrest.  Without downplaying their legitimate grievances, it's hard not to wonder how large a role neighbouring Iran, the leading Shiite nation in the region, may be playing in the unrest, or what influence it might have in the future.

It's all very well for Hillary Clinton and William Hague and the like to express support for democracy and human rights in Bahrain and elsewhere in the region, but realistically, that's not what's on offer.  And even if it were, the US and the UK might not be happy with the outcome, as the electoral success of Islamist parties in Egypt, Gaza and elsewhere has clearly shown.   Instead of criticising the Russians and Chinese for their unwillingness to support UN "action" in the region,  maybe we should ask ourselves if they're smarter than the rest of us.          

  

The man who could be King?

Sir Mervyn "no mates" King still has over a year left of his term in office as Governor of the Bank of England, but speculation over who will replace him has been running wild for months. Most of the candidates are entirely predictable.  They include the Bank's Deputy Governor Paul Tucker and former civil service boss Sir Gus O'Donnell, whose acronymic nickname, GOD, seems especially appropriate.  Today, however, a new name has emerged straight out of left field: Mark Carney, current Governor of the Bank of Canada, and also head of the global Financial Stability Board set up in the wake of the financial crisis.  The story has been widely covered on both sides of the Atlantic.  Here, for example, is a partly tongue-in-cheek take on it from the Globe and Mail in Toronto.

Sir Mervyn will be a tough act to follow, for the worst possible reason:  unfairly or not, he's now widely seen as having messed up most aspects of the job. Under his leadership, the Bank is accused of having been excessively lax in monitoring the health of the financial system prior to the financial crisis.  The fact that the government had taken much of the responsibility for regulation away from the Bank years before the crisis is not seen as offering much mitigation, as the Bank was still clearly the dominant player.

Since the crisis, the Bank is seen as much too lax in tolerating above-target inflation as it attempts to get the economy growing again.  Just this morning, Deputy Governor Tucker admitted that inflation could stay above 3% at least for the rest of 2012, a forecast that directly contradicts assurances made by Gov. King only weeks ago.  Complaints that stubborn inflation and rock bottom interest rates are punishing senior citizens are now a staple of radio phone-in shows.

If Mark Carney really is being sounded out as a candidate, there are two possible interpretations.  One is that the government is so dissatisfied with the Bank's track record in recent years that it wants to see a wholesale change of direction and management.  This would certainly exclude Paul Tucker from consideration as the next Governor, though it would not seem to rule out GOD, or some of the other non-Bank candidates.

The other interpretation is that the government wants to send a signal that it intends to take financial stability much more seriously.  With no disrespect to either Canada or to Mark Carney, it's hard to see that experience in running monetary policy in Canada can count for too much on Threadneedle Street.  The Bank of Canada may no longer be regarded as "the eleventh Federal Reserve District", but there's no denying that it has a lot less room to manoeuvre, and that its actions have far fewer global consequences,  than is the case for the Bank of England.

On the financial stability front, however, there may be a lot more to learn from Canada.  The Canadian banking system is one of the most stable in the world, and needed very little government help to weather the global financial crisis.  Much of the credit for this goes to decisions taken long before Mark Carney's time in office, notably the government's decision back in 1998 to disallow proposed mergers involving four of Canada's "Big Five" banks.  Still,  Canada's record of keeping a tight rein in its domestic banks may well be a key factor commending Mark Carney to the UK government.  If that's the case, the City of London is likely to be aghast. Let the lobbying begin!              

Blue debts bad, Red debts good

The Eurozone debt crisis is spooling up again.   For the moment it's Spain that's in the firing line, but the portents for the entire region over the next few weeks are not good.  Greece's "technocrat" government has resigned, paving the way for an election in early May that could well produce a new government that rejects the  terms of the EU/IMF bailout.  Even more ominously, there seems to be a good chance that France will elect as its new President the Socialist Francois Hollande, who has pledged to rewrite the entire EU fiscal pact.

It's interesting to see how US commentators are covering the crisis.  There is a remarkable degree of consensus there that the austerity measures Europe is imposing on itself are self-defeating and doomed to failure, and that only a pro-growth strategy can bring debt down to manageable levels.
 
It's not surprising to hear views of this kind coming from Nouriel Roubini, for example, or from Paul Krugman. What is remarkable is that the rabid, swivel-eyed free marketeers who write most of the well-known economics and investment newsletters are saying exactly the same thing:  Europe, or at least the usual suspects -- Greece, Spain, Portugal, Ireland for starters -- must spend more or tax less in the short term if it ever hopes to get on top of its debt in the longer term.

These folks, most of whom would probably be proud to be identified as card-carrying Republicans, offer a very different prescription for their own country.  Without exception, they see the free-spending ways of the Obama administration as a slippery path to Hell, or at least to the imminent loss of the United States's pre-eminence in the world economy, despite the fact that fiscal stimulus is the principal reason that US growth is   outpacing that of the Eurozone and the UK, both of which have opted for austerity.

So, come November, if Mitt Romney wins the Presidency, we can expect a sharp swing toward fiscal austerity in the US, right?  Er, no.  The Republicans talk a good game when they are out of office, but change their tune remarkably quickly once they get their man behind the Oval Office desk. Remember Alan Greenspan?  Yes, I know we'd all rather forget him, but when Bill Clinton was President, Greenspan  excoriated the Administration for planning even moderate fiscal easing. Once Bush Jr. was in office, Greenspan became the staunchest advocate of extravagant tax cuts.  

Take a look at this nifty chart*, which shows the US debt/GDP ratio all the way back to 1900, with the control of the White House, Senate and House colour coded.

If you go back to the 1960 and 1970s, you can see that the debt/GDP ratio was in steady decline regardless of who held the Presidency -- and this was, remember, the Vietnam war era.  Once Ronald Reagan arrived on the scene, however, the debt ratio took off like a rocket, and in the subsequent decade it has continued to rise sharply under a succession of Republican Presidents, falling only during the two terms of the Democrat Clinton.

It's true that the debt is rising sharply now under Barack Obama.  However,   as the chart shows, the latest upward spurt began under Bush Jr -- and whereas Obama is trying to alleviate the impact of the worst financial crisis in eight decades,  Bush was (prior to 2008) presiding over a strongly-growing economy.

US right wingers may be right to fret that the US ("the brokest nation in history") is running out of time to correct its fiscal problems; but recent history shows it's unlikely to be the Republicans that set a change of course.

* This is from Wikipedia, created by "Vision thing", used under creative commons license.  You can see a much larger version here.            

It's not easy being green

Just a quick catch-up on a couple of recent blog posts....

Back in early March I posted a little piece about our local council's plan to turn off the street lights at night in order to save money and (yawn) carbon emissions.  Update as of last night: on our street, the lights are still on!  The local paper reports this week that the scheme has been put on hold because of a fault with the light sensors specially installed as part of this project.  These had apparently begun to turn the lights off at random in other parts of the county, to the reported bafflement of the council's engineers.  It now appears that all 40,000 sensors (one per streetlight) may be faulty, and that replacing them -- which we are assured will not be at taxpayers' expense -- could take almost a year!

Lots of interesting questions here!  First, just how much has this scheme cost, anyway?  And if buying and installing 40,000 photo-sensitive cells cost anything like as much as I suspect they do, can we really believe assurances that the council is prepared to cancel the scheme after a couple of years if the citizens don't like it? Who was responsible for hiring the company that provided the sensors?  Apparently the "fault" is that the software couldn't handle the switch to British Summer Time a couple of weeks ago. Hello??  And lastly, given that the lights are supposed to switch off at midnight, when it's dark at all times of the year, just what purpose do the light sensors serve?  I'm no physicist, but I suspect we may not be getting the whole truth here.  

Now on to a more recent posting -- just this week, in fact, when I wrote about energy from waste (EFW) in the context of the UK's dwindling options for keeping the lights on.  The Times, which ran the original story about mounting local opposition to waste incineration, has been inundated with letters dissing the technology. (Original article and correspondence all paywall protected).  Interestingly, many of the letters say that fuddy duddy, old style incineration has now given way to a much superior alternative: pyrolysis.

Now, as I said a moment ago, I'm no physicist, but I am a one-time classicist, and I'm confident that the Greek root of the term pyrolysis means "fire".  (Same root as the word "pyromaniac"). A quick search on Google shows that pyrolysis is in fact....burning in a low-oxygen environment!  It's how charcoal has been  made for aeons. Companies that sell the equipment you need describe it as a "furnace", which gives you some sort of a clue as to what's involved.

So: old-style EFW and pyrolysis -- a distinction without a difference? Not necessarily. It does appear that pyrolysis plants are easier to build, and that there is a lot less residue to dispose of at the end of the process.  Even so, this is really just a more advanced version of rubbish burning, and as such it's unlikely to be well received by the NIMBYs,  who don't want trucks of rubbish trundling through their neighbourhoods (unless, that is, they're carting it to somebody else's neighbourhood).

It's also unlikely to appease the greens.  Here is a good overview of pyrolysis from the Friends of the Earth website. They're still mostly opposed to it, mainly on the largely unproven basis that pyrolysis, like incineration, reduces the pressure to recycle. I'm sure you know the old saying that "the best is the enemy of the good". Incineration and pyrolysis both look like good solutions to a mounting problem.  If the NIMBYs and the greens combine to stop us from implementing either one, it's inevitable we'll just keep sending the waste to landfill. At least the rats and the seagulls will be happy.

Boris and Ken, Johnny and Joe

Excellent news!  The campaign for the mayoralty in London is set to be a dirty, no holds barred fight between two men,  Boris Johnson and Ken Livingstone,  who really, really hate each other.  The real issues facing Londoners are unlikely to get much of a look in; this is going to be personal, and it's going to be nasty, which should be great fun for those of us who don't actually have to live in the Great Wen.

In the red corner, meet Ken Livingstone, a man who has already served a term as mayor and has been close to the apex of London politics since the days of Margaret Thatcher.  Ken once attempted to explain the apparent inconsistency between his old-style socialist views and his expense account lifestyle by comparing himself with the French Revolutionary hero,  Georges-Jacques Danton.  It's possible that Ken doesn't know that Danton finished up with his head in a wicker basket,  after an encounter with the guillotine.

Over in the blue corner, we find Boris Johnson, the incumbent. (Note to non-UK readers: yes, that is his real name, though he has various other given names in reserve -- his full name is Alexander Boris de Pfeffel Johnson).  Old Etonian Boris thinks it's a good idea to reach out to the voters in one of the most polyglot cities on earth by regularly lapsing into one of the few languages that almost none of them speak: Latin.

In Ken's favour, he has no ambitions except to be mayor of London, though many voters who lived through his previous tenure in the job might feel that even that is well beyond his abilities.  Boris, in contrast, sees the London job as a stepping-stone toward his real ambition: he wants to be in pole position if and when things fall apart for David Cameron in Downing Street. Boris and the PM are both Old Etonians, but there is little old school solidarity between them.

There is one ambition that unites Boris and Ken: they're both desperate to be in the mayor's job when the Olympics come to town in July.  Ken was mayor back when the Olympics were awarded to London in 2005, while Boris was in the job at the time of the Beijing Games, presiding over the rather tawdry handing-over ceremony at the end of that Olympiad.  Both apparently find the lure of being the one to introduce Chas and Dave to the world at the London opening ceremonies impossible to resist.  (Another note to non-UK readers: you may want to think twice about opening that link!)

Those opening ceremonies are apparently going to feature performances by big names from British pop music over the years (which probably excludes Chas and Dave).  One name that won't be there, however, is Johnny Rotten: the Sex Pistols have turned down the invitation.  As a result, the punk era will probably be represented by Joe Strummer and The Clash.  One of their best known tunes, London Calling, apparently commends them to the organisers as an obvious choice. This can only mean that none of the organisers has actually listened to the apocalyptic lyrics. Sample:


The ice age is coming, the sun's zooming in
Engines stop running, the wheat is growing thin
A nuclear error, but I have no fear
'Cause London is drowning, and I live by the river

And why stop there?? After the opening ceremonies, maybe we can get Paul Weller to head to the site for the shooting events down at Bisley, and strike up the equally inappropriate Eton Rifles -- but only, of course, if Boris Johnson wins the mayoral election.

Lights out

Today's Times (paywa££ protected) leads with the news that plans to incinerate household waste in the UK, both to reduce the need for landfill and to fill the looming gap in electrical power generation, are in jeopardy.  Locals are worried about pollution risks and traffic problems ("huge HGVs coming down our narrow country lanes"), while environmentalists argue that incineration reduces the incentive for people to recycle.

I have some personal experience with energy-from-waste (EFW) plants, from my banking days in Canada a couple of decades ago.  I recognise these arguments against incineration, and know them to be almost entirely false. The insanely parochial Toronto Star would routinely talk of EFW plants "spewing deadly dioxins", when a more accurate description would be "emitting trace amounts of a chemical with no known adverse health effects".  Tiny amounts of dioxins are emitted every time you strike a match or fire up the barbecue. Scientific studies showed that the air emitted from the stack of an EFW plant was much cleaner than the air taken in at the base -- though, if you've ever descended into Toronto airport through the brown miasma that passes for that city's atmosphere for most of the year, you may see that as a very low barrier.

By and large, the facts made very little headway against the prejudices in Canada back then, and there's every probability that the NIMBYs and the greens will be able to do serious damage to EFW plans in the UK as well.  If we can't use EFW, then, exactly how is the UK going to meet its electrical power needs in the years and decades ahead?  Let's take a quick roll-call.

Nuclear? The Government is in favour, subject to some strict conditions, but as the UK's engineering sector has been comprehensively hollowed out, any new nukes would have to be built by foreign companies. The industry is running scared on a global basis, thanks to last year's events at the Fukushima reactor in Japan (death toll to date: still zero), so that doesn't seem like something we can rely on.

Shale gas? The UK seems to have huge reserves, but the environmentalists, horrified by the possibility that conservation efforts might be derailed if we were foolish enough to exploit an abundant and cheap new energy source, are talking up scare stories about undetectably small earth tremors that may result from the "fracking" process.

Wind? The government likes it, but people (and birds) in the vicinity of the turbines certainly don't.  It's spectacularly unreliable -- it doesn't like too much wind, or too little -- and so requires a whole fleet of conventional power stations to be kept on standby for those times when the wind doesn't cooperate.

Solar? Helpful at the margin, even in the UK's habitually gloomy climate.  However, attempts to promote it in recent years led to such rampant profiteering that the tariffs have been reduced, and it remains to be seen how much of the industry will survive.

Tidal?  There's lots of potential:  the Bristol Channel is the second-most powerful tidal bore in the world, after Canada's Bay of Fundy.  However, the capital costs are immense, making it a non-starter under current economic conditions, and there are also environmental issues that could rule it out.

Coal? You must be joking.

Oh dear.  Much of the UK's existing nuclear and coal-fired generation capacity is scheduled to be decommissioned in the next few years to meet EU regulations.  If we rule out all of the domestically-available options,  it looks like we be ever more dependent on importing gas from our friends in Norway, Russia and Qatar for the foreseeable future.  What could possibly go wrong?

Maybe his boat race* didn't fit

The smirking doofus who disrupted the Oxford-Cambridge boat race on the Thames yesterday -- and nearly got scalped by an Oxford blade for his pains -- has apparently said that he did it to protest against "elitism".

The perp's not-remotely-elitist name is Trenton Oldfield. If that makes you suspect that he maybe wasn't brought up on a sink estate in Peckham, you'd be quite right: he hails from Sydney, Australia, where he was educated at a not-at-all elitist private school.  After that he took a degree at the wholly elitism-free London School of Economics.

Seem to me there's only one question the police need to ask Trenton.  Was it Oxford that rejected your application, or was it Cambridge?

* Cockney rhyming slang, something with which a man of the people like Trenton is no doubt familiar.  "Boat race" = face.  

At best, less worse

As expected, the Bank of England kept its key rate unchanged at 0.5% today, and also left the size of its quantitative easing (QE) programme at £325 billion. With inflation finally heading down toward the Bank's 2% target,  there is no reason to expect interest rates to change for a long time to come. However, with growth prospects still looking shaky -- the Bank is expecting a zig-zag pattern this year, as one-time influences such as the Queen's jubilee and the Olympics play themselves out -- there is still the possibility of a further increase in the QE programme in the coming months.

The interplay between inflation and growth trends is an interesting one, and regularly generates some ill-thought-out comments in the media.  I have regularly castigated the Bank for its seemingly cavalier attitude towards above-target inflation in recent years, a view that is, of course, entirely unrelated to the fact that I am on a  fixed income. However, there seems to be a view in the media that as inflation comes down, the damage caused by past price increases will somehow be unwound.  Take this quote, for example, from the BBC website's coverage of today's rate decision:

"Lowering inflation is seen as key to the recovery as it will help alleviate the squeeze on consumers and lead to a rise in spending." 

Really? Surely reducing inflation will do no more than stop the squeeze on living standards from getting any worse. The real purchasing power that has been eaten away by inflation in the last three or four years will not be recouped unless and until earnings start to rise faster than inflation. My own quick calculation suggests that CPI inflation outpaced growth in average earnings by a cumulative total of just under 7 percent between the end of 2007 and the end of 2011. That's a nasty bite, and one that would take a long time to repair even under much more favourable circumstances than we currently face.  

To be fair to the Bank of England, its own position on this key issue is a lot more nuanced than that of the media.  This is from the Bank's February Inflation Report:  "Domestically, the strength of the recovery will depend on whether household spending has further to adjust to past falls in real incomes and the more uncertain economic outlook."  Exactly so; and with unemployment slowly but steadily rising, the psychologically important price of fuel at an all-time high, and the Government poised to take more money from the "squeezed middle" when the new tax year starts tomorrow,  it's hard to get too optimistic about prospects for household spending, even if overall CPI does continue to head toward the Valhalla of the 2% target.

This "recovery" is coming to remind me more and more of the 1990s in Canada, when the government there finally and successfully got to grips with its fiscal situation.  The data for the decade now show that the Canadian economy eked out slow but steady expansion, but it would be hard to find many Canadians who would say that they felt any better off.  It was in many respects a lost decade.  I suspect that this current period in the UK will look rather similar when we come to look back on it ten or twenty years hence. Words cannot express how happy I am to be able to live through this kind of thing twice.  

The OECD is wrong, at least for now

Last week the OECD predicted that the UK economy would record a 0.1% decline in GDP for Q1.  This would mean that the economy had fallen into the dreaded "double dip" recession,  since GDP fell by 0.3% (originally estimated at 0.2%) in Q4/2011.  The OECD also opined that the UK would experience more sluggish growth in the medium term than most of its peers.

That medium-term outlook may well turn out to be true.  There is no sign that the government is ready to slacken the pace of fiscal tightening, and ultra-loose monetary policy seems to be doing little more than allowing the economy to stay afloat.  That's nothing to be sniffed at, of course.  Although unemployment in the UK has been rising in recent months, it has stayed a long way below the dire levels that some experts predicted when the financial crisis hit.  Even now it stands far short of the appalling rates evident elsewhere in Europe: Spain, for example, where overall joblessness is now 24%, and the rate for young people is massively higher than that.

On a more positive note, however, it's very likely that the OECD's forecast of a fall in GDP for Q1 will turn out to be wrong.  A number of commentators have noted that the surge in fuel sales last week, amid strike-driven fears of a supply shortage, will have boosted consumer spending for the entire quarter.  Some experts have gone so far as to suggest that the government actually provoked the fuel panic in order to achieve exactly that outcome, in order to make sure the OECD's forecast was wrong.  This seems very far-fetched, if only because it implies a level of cunning far beyond anything the government has displayed in recent times.

Other, more concrete indicators also point to positive growth for Q1.  The Markit/CIPS purchasing managers' index for March showed its strongest reading for 10 months, at 52.1 (where any reading above 50 implies expansion of the sector).  Separately,  a joint study by the CBI and the accountancy firm PwC showed that the financial services sector expanded in Q1 for the eighth straight quarter. Add in the fact that retail sales started the quarter on a strong note (even though there was a setback in February), and it's hard to see why the OECD is so pessimistic about overall GDP (official data for which will be released on April 25).

After Q1, things may get tougher for a while.  Bank of England Gov. King has already predicted that GDP may fall slightly in Q2, because of the extra public holiday to mark the Queen's diamond jubilee.  By the same logic, Q3 might also be tough, given that much of London will be off limits to all sane people for a month or so while the Olympics are in town.  And, of course, there's still the threat of a fuel drivers' strike. Panic buying of petrol may have boosted consumer spending last week, but if the pumps really did run dry, even for a short while, the impact on the economy would be very severe.