As Government Stands Firm, Analysts See Risk of New Recession in Britain
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Version 0 of 1. LONDON — As George Osborne, the chancellor of the Exchequer, prepares this week to update Parliament on his plans for the economy, the prospect of stagflation is back to haunt Britain. Recent disappointing economic data coupled with rising consumer prices have heightened fears among some economists that Britain is once again edging closer to a recession, leaving Mr. Osborne and his austerity plan increasingly isolated. Calls for Mr. Osborne to take a break from his relentless efforts to balance the budget and instead find ways to get economic growth back on track intensified in advance of the annual budget, which he is to present to Parliament on Wednesday. Even within his own Conservative Party and among members of the government’s junior coalition partner, the Liberal Democrats, lawmakers have started to suggest that it time for a new approach. “The pressure is mounting on Mr. Osborne,” said Simon Wells, an economist at HSBC. “He’s been in the job almost three years, and over this period the economy has grown by a measly 1 percent.” That compares with 4.9 percent growth in the United States during that span, 3.7 percent in Germany and 1.7 percent in France, according to Mr. Wells. “With an election looming in 2015, he needs growth if he is to stabilize the public finances, and he needs it soon,” Mr. Wells said. Some lawmakers and economists suggested that Mr. Osborne should use the budget update to announce a slight increase in borrowing to invest in infrastructure, education and other projects that would help revive growth. But the government is widely expected to stick with its plan of balancing the books within five years, even as a deteriorating economy makes achieving that goal more difficult. “This month’s budget will be about sticking to the course, because there’s no alternative,” Prime Minister David Cameron said in a speech last week. In January, Britain’s industrial production surprisingly fell to its lowest level in 20 years, reviving concerns that the country could fall back into a recession for the third time in little more than four years. A dismal economic outlook had pushed the pound to the lowest level against the dollar in nearly three years; that makes imports more expensive and threatens to increase inflation that is already above the E.U. average. Higher consumer prices in turn would further cut spending power. Irfan Aslam, the founder of Global Components, a British supplier of bolts, textiles and other components to the local furniture industry, said the weak pound had already hurt his business by making parts he buys in the United States and Europe more expensive. “It’s having a real detrimental effect on the business,” said Mr. Aslam, 37. “It forces us right to the edge.” Mr. Aslam had to postpone plans to expand his warehouses and hire staff members and said he might be forced to pass price increases to his customers. “Demand is weak anyway, and we should be thinking about offering promotions to create demand, but we can’t. We’re actually thinking about increasing prices,” he said. The government and the Bank of England had welcomed a weaker pound, arguing it would help the economy by making British exports cheaper. But the recent slump of the currency against the dollar, as well as the euro, prompted Mervyn King, governor of the Bank of England, to change his tone. In an interview with the television channel ITV on Thursday he said the pound was now “properly valued,” indicating a further decline was not desirable. Ha-Joon Chang, an economist at the University of Cambridge, said Britain had failed to generate a trade surplus despite the relatively weak pound because the country was unable to produce enough valuable goods that could be exported. Britain’s economy shrank 0.3 percent in the final quarter of last year and is expected to grow 1 percent this year, according to the International Monetary Fund. The opposition Labour Party has been pointing to the weak economic growth as evidence that Mr. Osborne’s austerity plan — which has included some tax increases, the elimination of tens of thousands of public sector jobs and cutting social benefits — was not working. Austerity is choking the economic recovery, opposition lawmakers have argued; they say the government needs to increase spending to fuel growth. Mr. Cameron has repeatedly rebuffed such criticisms and instead blamed the euro zone and higher fuel costs for the troubles. But in an embarrassing gaffe this month, Mr. Cameron quoted the Office for Budget Responsibility, an independent group that provides economic forecasts, as being “absolutely clear” that the deficit reduction plan was not responsible for Britain’s economic difficulties, only to be contradicted a day later by the O.B.R. chairman, Robert Chote. The group’s forecasts “incorporated the widely held assumption that tax increases and spending cuts reduce economic growth in the short term,” Mr. Chote wrote in an open letter. The success of Mr. Osborne’s plan to eliminate the budget deficit by 2017 has hinged on the strength of the economic recovery. But sluggish growth last year has already forced Mr. Osborne to acknowledge, which he did in December, that it would take a year longer — well into 2018 — to achieve his target of balancing the budget. Disappointing tax revenue and rising benefit payments have made his job more difficult. And yet, the Cameron government has been sticking to its plan, arguing that anything else would raise concerns among investors about Britain’s ability to pay its debt, which would drive up borrowing costs. Taking on more debt — even short-term — was not an option. There was no “magic money tree,” Mr. Cameron said in his speech. Some economists expect Mr. Osborne to turn to the Bank of England to pump more money into the economy. The central bank has already poured in £375 billion, or $562 billion, over the past four years by buying assets, mostly government bonds, and it is expected to buy more soon. Mr. Osborne could perhaps ask the Bank of England on Wednesday to adopt a more flexible approach starting in July when Mark Carney, the head of the Canadian central bank, is to take over as governor of the Bank of England. The central bank, on its own, could also focus more on reviving growth than on reducing inflation to its target of 2 percent, some economists said. Mr. Cameron has already hinted that he would welcome interest rates that remained close to the current record low of 0.5 percent. A sharp rise in interest rates would do “unthinkable damage” to Britain’s economy, he said in the speech last week. Meantime, opposition is brewing even within the government’s ruling coalition to Mr. Osborne’s reluctance to consider alternatives to debt reduction. Vince Cable, the business secretary and member of the Liberal Democrats, wrote in an article earlier this month that more borrowing to finance projects like new schools or roads could revive growth. |