CHRISTMAS arrived a little early this week, or so it might appear to Chancellor George Osborne.
The economic tempo in the UK is well and truly on the up, sufficient indeed for the analysts in the OECD think tank in Paris to raise their forecast for growth next year to almost normal – or pre-recession – levels. Shout it loudly: the UK now has the fastest growing economy among the G-7 industrial nations.
The CBI – not always the Chancellor’s best friend – reported that manufacturing orders are accelerating at a 20-year high, while house prices have recovered sufficiently to fill the Treasury coffers with cash from the resulting stamp duty. The latter is important as it reduces the UK government’s annual borrowing requirement. In fact, the Chancellor might find he needs to raise some £10 billion less this financial year than he originally planned for.
This unexpected improvement in Treasury’s books has prompted a rush of speculation that Osborne might decide on a Christmas give-away in his mini-budget due on December 5. Don’t count on it. Osborne may have been the youngest Chancellor of the Exchequer in a century but he is also one of the most cautious.
He believes – rightly or wrongly – that the private sector is recovering precisely because he held out against the siren calls for premature fiscal expansion, so he is in no rush to play Father Christmas. Whether that will hold true come the main Budget in the spring is another matter, especially if Labour’s recent lead in the polls continues.
The Chancellor is also aware that the current improvement in the UK economy is based on narrow foundations.
Namely, a mini-housing boom prompted by his Help to Buy subsidy scheme and a sudden – and inexplicable – burst of optimism on the part of consumers, who are funding their retail therapy by eating into savings.
In the real economy there is no sign of an upturn in industrial investment or labour productivity, and the trade deficit is widening precipitously.
There’s also the little matter of the Chancellor still having to take the equivalent of 4 per cent of GDP out of public spending in order to complete fiscal consolidation by 2018.
Which might explain why – unlike Wall Street and Hong Kong – UK shares marked time this week rather than yield to misplaced euphoria about the economy.
And on the other hand... OECD on euro printing
Speaking of the OECD, what it said about the rest of the global economy is more important than what it said about the UK – and much more pessimistic.
The OECD warns that the global recovery is by far the weakest since 1945. Output is only 3 per cent above its 2008 peak compared with 10 per cent after the same period in the 1990s, and 15 per cent in the 1980s.
The OECD warned of “virulent episodes” in emerging markets if the US Federal Reserve starts to wind down printing dollars to purchase bonds – something that could short-circuit recovery altogether. The normally cautious OECD chief economist, Pier Carlo Padoan, called on the European Central Bank to print euros “if deflationary risks become more serious”. He even called for “symmetric” measures in Germany, code for Berlin to import more.
Doubtless Berlin will dismiss Padoan as another carping Italian – along with Mario Draghi, boss of the ECB. But he is right.