Scott Reid: QE a hot topic once more as growth falters

Stretching it, perhaps, to believe that the issue of further money printing by the Bank of England could usurp last night’s match or Corrie highlights as the hot topic of office debate, but the remark reinforces the importance of the latest official figures.

We now know that Britain’s economy shrank by 0.3 per cent in the final quarter of 2011, as the crucial service sector faltered and household spending slumped. Analysts had pencilled in an unrevised reading of 0.2 per cent.

The third and final estimate from the Office for National Statistics (ONS) means the economy entered the New Year in a more-perilous position than previously thought. It has added to nerves about its ability to return to growth in early 2012.

Recent survey results have pointed to a relatively-healthy opening quarter, with solid manufacturing and services sector outcomes and even tentative signs of a recovery in construction. Indeed, most economists are still expecting a modest rise in first quarter gross domestic product (GDP).

Some of those economists have been wrong-footed before and, aside from the headline revision itself, the GDP figures are said to offer few new clues as to the fate of the economy.

My hunch is that we will avoid falling back into a recession – defined as two back-to-back quarters of contraction. However, growth during Q1 is likely to be anaemic – possibly just ahead of the no-change. Consumer spending, or rather lack of it, will remain a major drag.

Tuesday’s distributive trades survey from the CBI highlighted that issue, with UK retailers braced for a tough summer ahead.

Evidence of belt-tightening was reinforced in yesterday’s ONS report. During 2011 as a whole, household disposable incomes fell by 1.2 per cent – the biggest drop since 1977.

Which brings us back to that water cooler moment and the key question facing central bank officials: to QE or not to QE?

The Bank restarted its programme of fiscal stimulus in October and is halfway through its latest £50 billion tranche of asset purchases. Opinion has been divided as to whether additional QE will take place when the £325bn programme reaches its conclusion in May.

Two of the Bank’s nine-strong monetary policy committee – David Miles and Adam Posen – have argued the case for extra stimulus in the past couple of months.

Next month’s initial reading of Q1 GDP could prove decisive in persuading some of their colleagues to join them.

‘Pie tax’ threatens to eat into jobs growth

COULD we see the Chancellor perform a Budget U-turn? The boss of bakery chain Greggs certainly hopes so.

Scots-born Ken McMeikan has been turning up the heat on George Osborne following the decision in last week’s Budget to put VAT on pies and pasties.

The measure, the Treasury argues, will simplify the tax system and put everyone selling hot produce on the same footing as fast-food chains.

Osborne could not have been anticipating the high-profile backlash to what has been dubbed the “pie tax”.

Critics have even pointed to the contrast of a cut in the 50p top tax rate.Arguing his case on BBC2’s Newsnight programme, McMeikan said he feared the changes would seriously damage the industry and cause job losses.

Not to mention hitting hungry shoppers and office workers in the pocket with a sausage roll set to rise by 18p and a hefty 50p on a medium Cornish pasty.

The Greggs’ chief executive, who only this month vowed to push ahead with scores of store openings despite a slowdown in recent sales, claims that the government is also inadvertently creating “huge complexity” over the tax rules.

Unsurprising, really, when the ambient temperature outside is used as a reference point for the application of the levy. Cue the VAT man with thermometer in hand.

Osborne insists the move is straightforward and closes a tax loophole.

Yet it is unlikely to raise much additional revenue and could jeopardise expansion and much-needed retail sector jobs, leaving a nasty aftertaste.