Get ready for stimulus – or more austerity

Now, ahead of a G7 summit in Marseilles of finance ministers and central bankers, she is calling for “bold action” on the faltering world economy, praising America’s Barack Obama for his $405 billion (£282bn) stimulus plan to boost jobs in the world’s biggest economy. The summit is again expected to call for a “co-ordinated response”. But does this mean sticking with the austerity measures – or following Mr Obama?

A further paradox surrounds increasing calls for further “QE”, or monetary easing, by central banks. But as with America’s previous fiscal boost, the stimulus effect of these is patchy at best. The problem is that the flow of money as the sluices are opened does not seem to percolate much further than bank balance sheets. It is not flowing through to lending to small and medium sized companies as policymakers had hoped. The OECD is the latest to cut its growth forecast for the UK to just 0.1 per cent in the final two quarters against 0.4 per cent previously. There is now a sea-change afoot, as the risks of recession rise. George Osborne hinted yesterday at “a heightened readiness to respond – particularly if it looks like the economy is headed for a prolonged period of weak growth and high unemployment”. He is right to get ready.