It's easier to destroy jobs than to create; and that's exactly what the austerity measures are going to do - create a rise in unemployment. The private sector will create jobs slowly but it won't be enough to take up the slack. Which means that 2011 will bear the brunt of job losses. The bad news is that unemployment is rising before the austerity measures have kicked in and this has led to Q4 2010 GDP being below zero - that's one leg of a potential recession - the dreaded or rather much talked about double-dip recession.
Although the chancellor and other commentators are blaming this on the weather we had in December, unemployment has been rising since October 2010 betraying the fact that the economy has been going down since then; the cold spell simply made it worse. Instead of reacting positively to reassure the public and especially industry with positive policies that will underpin it; they chose to remain steadfast without any alternative actions the much talked about Plan B.
My only advice is that, if 2011 is going to bear the brunt of the austerity measures and the fact that the Chancellor has promised industry to reduce Advanced Corporation Tax (ACT) by a penny each year until 2014, he should bring forward to 2011 so that in the March Budget, the Chancellor should announce a 2% cut in the ACT and none in 2014. By 2014, the economy would be on a firmer footing and wouldn't need a tax cut.
What's worrying about the Chancellor's lack of a Plan B is that he admits that December's cold spell was unforeseen, he's implying that there will be no more unforseen events that will knock the economy for six. The lack of contingency planning is worrying and damages people's and industry's confidence in themselves and the Government's ability to deal with unforeseen upheavals to the economy. Industrialists wouldn't feel encouraged to take risks knowing that the Government wouldn't budge on their austerity measures nor create a contingency plan to deal with unforeseen calamities.
It is said that the stock market depends on people's confidence and the same applies to industry. If the suppliers are tightening their belts because of uncertainties and the public are reducing their spending for the same reasons then GDP can only go down making a double-dip recession a reality - we're already half way there.
Don't be fooled by January's construction figures because they're doing the work they didn't do in December because of the cold spell. Manufacturing has been doing well for a long time because of the low value of the pound which makes exports cheaper. This will be adversely affected when base rates eventually rise and will have a negative effect on the economy hence GDP. But the main worry is the service sector, the biggest contributor to GDP; it had been declining for a number of quarters with no signs of a let up. All these factors don't bode well for the economy nor public policy.
The Bank of England needs to delay any decision to raise base rates until May after Q1 GDP figures have been published. If they're low or worse, they're negative, they should delay until the Autumn at the earliest. The Chancellor has a dillemma: whether to announce positive help for industry and consumers early i.e. in March; or wait till late April, after Q1 GDP figures have been published. This means that the Chancellor will have 2 versions of the Budget: the March Budget which will assume that everything went according to plan and no changes made; and the April Budget which will assume that things had went horribly wrong and will put measures in to stimulate the economy and encourage consumers to spend in a desparate attempt to pick GDP up.
The presence of 2 budget plans is similar to a plan A and a plan B. These are the rules of business. I may be pessimistic but we can't take a chance with the Economy. If we do go into a double dip recession, it will prove once and for all, that the austerity measures were brought in too soon and at too high a level. It looks like we'll still lose our triple-A rating because the Government doesn't know what the problem is; they're just picking a single strand and follow that at the expense of everything else.
The WPM has always been optimistic: they forecast that the British Economy would turn in Q1 of 2010 and used that to forecast that the repossession rate will be 50,000 in 2009 when the CML were forecsting 75,000 and it came in at 46,000; their forecast for 2010 was 38,000 as opposed to the CML's 53,000 and it came in at 36,000. But, despite this optimism, the rising unemployment and the sinking GDP figures BEFORE the austerity measures takes place, has made the WPM pessimistic about the future to such a point that they've shelved their forecast of 32,000 for 2011 (we were still optimistic) in order to help with stabilising the economy.
My conclusion is that the British Economy is fragile in that it's very sensitive to negative events which seems to have a disproportionate negative effect on it. To me this reflects indutry's and the public's dissatisfaction with the Government policies. If the British Industry and the British people are dissatisfied with their Goverment's policies, how do you think foreign investors are going to react. When I said that we will still lose the triple-A rating, I wasn't joking.
The Government really needs to identify what the real problems are and tackle them. They need to take the people and industry with them to inspire that illusive confidence that may breathe new life into the Economy.
So, will we see a radically changed Budget in March or April? Will the BoE raise rates in May or April? Will Q1 GDP be negative again proving the double dip recession that everyone had forecasted?
Stay tuned...
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