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| George Osborne is upbeat, but the squeeze shows no sign of ending soon | George Osborne is upbeat, but the squeeze shows no sign of ending soon |
| (about 2 hours later) | |
| In the middle of a week the government will want to forget, George Osborne was in upbeat mood when the International Monetary Fund delivered its verdict on the UK economy. | In the middle of a week the government will want to forget, George Osborne was in upbeat mood when the International Monetary Fund delivered its verdict on the UK economy. |
| The message from the IMF was simple. Britain had overcooked the austerity and it was time to turn down the heat. But the chancellor knew the criticism was coming, was grateful that it was couched in polite language and took the view that it could have been worse. | The message from the IMF was simple. Britain had overcooked the austerity and it was time to turn down the heat. But the chancellor knew the criticism was coming, was grateful that it was couched in polite language and took the view that it could have been worse. |
| Osborne takes much the same view of the state of the economy: things could be worse and may be about to get better. The dreaded triple dip has been averted and there is reasonable hope that revisions to past economic data by the Office for National Statistics will expunge the double-dip downturn of 2011-12 from the record books. Inflation is coming down, new car sales are strong and, with a bit of help from the Bank of England, activity is starting to return to the housing market. | Osborne takes much the same view of the state of the economy: things could be worse and may be about to get better. The dreaded triple dip has been averted and there is reasonable hope that revisions to past economic data by the Office for National Statistics will expunge the double-dip downturn of 2011-12 from the record books. Inflation is coming down, new car sales are strong and, with a bit of help from the Bank of England, activity is starting to return to the housing market. |
| Osborne is not getting carried away by any of this. When he arrived at the Treasury in May 2010, he thought the economy would be humming by now and it clearly isn't. Even so, he thinks there is time between now and the next election for the government to win the economic argument, not least because after two years in which output has barely grown at all, the Conservatives still score higher than Labour in opinion polls for economic competence. | Osborne is not getting carried away by any of this. When he arrived at the Treasury in May 2010, he thought the economy would be humming by now and it clearly isn't. Even so, he thinks there is time between now and the next election for the government to win the economic argument, not least because after two years in which output has barely grown at all, the Conservatives still score higher than Labour in opinion polls for economic competence. |
| The chancellor's approach to winning the 2015 election was summed up in three brief sentences in the speech he made welcoming the IMF team to the Treasury on Wednesday. "There are no easy answers to problems built up in the UK over many years." (Loose translation: Labour left the country in a right state so it's not our fault life is so tough.) "It's a hard road to recovery." (Loose translation: the upturn due to arrive three years ago has been delayed due to problems in the eurozone; we apologise for any inconvenience caused.) "But we're making progress." (Loose translation: things are starting to get better, so think twice about handing power back to the people who screwed things up in the first place.) | |
| Expect to hear more of these arguments over the next couple of years, particularly if the modest 0.3% expansion in the economy in the first three months of 2013 proves to be the harbinger of better times ahead. | Expect to hear more of these arguments over the next couple of years, particularly if the modest 0.3% expansion in the economy in the first three months of 2013 proves to be the harbinger of better times ahead. |
| The improvement has been a long time in coming. Britain's national output remains more than 2% below where it was at its peak in early 2008: by this stage after previous recessions – even the Great Depression of the 1930s – all the lost ground had been recouped. | The improvement has been a long time in coming. Britain's national output remains more than 2% below where it was at its peak in early 2008: by this stage after previous recessions – even the Great Depression of the 1930s – all the lost ground had been recouped. |
| Osborne and Sir Mervyn King, the outgoing governor of the Bank of England, believe the economy's weakness in 2012 was exacerbated by problems in two specific sectors – construction and North Sea production. With both looking healthier in 2013, the expectation is that growth will accelerate, not spectacularly but by enough to support the chancellor's narrative that better times are coming. | Osborne and Sir Mervyn King, the outgoing governor of the Bank of England, believe the economy's weakness in 2012 was exacerbated by problems in two specific sectors – construction and North Sea production. With both looking healthier in 2013, the expectation is that growth will accelerate, not spectacularly but by enough to support the chancellor's narrative that better times are coming. |
| Osborne's other reason for optimism is that Mark Carney's arrival at Threadneedle Street from the Bank of Canada on 1 July is expected to lead to further stimulus measures, offsetting the drag on growth caused by deficit reduction. The chancellor fought hard to persuade Carney to take the job; he has high hopes that an overseas Bank governor can do for the economy what overseas managers never achieved for the England football team. | Osborne's other reason for optimism is that Mark Carney's arrival at Threadneedle Street from the Bank of Canada on 1 July is expected to lead to further stimulus measures, offsetting the drag on growth caused by deficit reduction. The chancellor fought hard to persuade Carney to take the job; he has high hopes that an overseas Bank governor can do for the economy what overseas managers never achieved for the England football team. |
| There are those who think Carney has been overhyped and that like Sven-Göran Eriksson and Fabio Capello his plans will run up against deep-seated structural problems. These include the economy's over-reliance on the City and the housing market; the concentration of prosperity in London and the south-east; the UK's inability to pay its way in the world; decades of underinvestment in productive capacity; and the low level of skills. Osborne is nowhere near cracking any of them, and plans to rebalance the economy towards manufacturing and exports have been abandoned for now in favour of attempts to kickstart the housing market. Any growth will do at this stage of the electoral cycle. | |
| Yet, Osborne has a battle on his hands to generate a feelgood factor by 2015. One of the strongest correlations in British politics is between electoral support and real incomes: when wages and salaries are rising faster than prices incumbent governments do well; when inflation is higher than earnings growth, they are shown the door. | |
| The government has presided over a squeeze on real incomes unprecedented in recent times and needs to end falling living standards if it is to have a chance of being re-elected. Osborne's problem is that with earnings rising at 0.4% a year and prices at 2.4% a year the squeeze is still going on and shows no sign of ending any time soon. |