The Ernst & Young ITEM club, which uses the Treasury’s own business forecasting models, is predicting that the UK will “muddle through” 2013 with growth of under 1%. Taking inflation into account this is effectively negative progress. It says that the Government has “lacked drive and initiative” in countering the grim trading position.
This judgement is exacerbated by the Prime Minister’s self destruct wish to destroy our relationship with Europe. Regardless of individual views on EU rules and immigration matters, the key issue is the UK’s lacklustre trading performance.
This contrasts badly with other counties. There are three main currencies in the world: the dollar, the euro and the yen (the pound is in fourth place). America is pursuing a weak currency policy by the use of regular measures of quantitative easing (“QE”). The dollar is 12% lower than in 2008 when the global crisis began. It is actually 31% down over the last decade as measured against a basket of global currencies.
The Japanese approach is similar with a £72 billion stimulus designed to drive the yen lower in order to boost exports (and annoy one of its main competitors South Korea).The euro has recently risen 14% against the yen.
The pound has dropped below the 1.20 euro mark for the first time in ten months. This is partly the result of better news coming out of the EU. Ireland is staging a ‘Celtic comeback’: their deficit has fallen from more than 13% of GDP to around 8%. It is likely to exit its international bailout programme by the end of this year. It recorded record exports in 2012.
Spain is forecasting a 3% trade surplus in 2013 and in the last week sold 4.5 billion Euros of new bonds at lower costs. Greece is reporting a lower than expected deficit of 3.5% of GDP in 2012 (against 10% in 2011). Portugal is also suggesting an improved trading position.
This puts the UK performance into perspective. The International Monetary Fund is expected to downgrade growth forecasts below the 1.1% it stated in October 2012. A triple dip recession and a possible downgrading of the AAA rating seems hardly the right moment to question the UK’s commitment to the EU.
The extra costs which could follow in terms of financing the budget deficit will add to the growing inflationary pressures. No wonder the incoming Governor of the Bank of England wants to change the measure of progress by concentrating on GDP growth.
He may wish that he had come a little earlier if only to stop the UK’s Prime Minister from wrecking decades of progress in securing our strong export performance with the EU.