Britain's economy is facing more stagnation and more inflation than the rest of Europe

February 26, 2010 12:05 PM

Earlier this week, I wrote about how the manufacturing order statistics fitted the pattern of Britain having a weak recovery compared to the rest of Europe.  Even with the revision of the growth statistics announced this morning, the evidence still suggests we're not having a good time of it.

New Eurostat figures out today show that we are also facing high inflation relative to other European countries.  At an annual rate of 3.5 per cent, we're facing more than double the rate across the EU (1.7 per cent) and more than three times the rate in the eurozone (1.0 per cent).  Inflation is only higher in Poland, Romania and Hungary.

High inflation combined with anaemic growth is extremely bad news.  It means households are caught between rising prices and stalling incomes.  And high inflation makes it much harder for the Bank of England to maintain an expansionary monetary policy, which could undermine the fragile recovery.

One reason Britain is having such a hard time is that, as financial services are such a large share of our economy, we suffered a deeper structural shock than other economies, which got in trouble as demand fell globally.  But the economy was also woefully prepared for the shock thanks to poor Government policy.  At the very start of the recession, we produced a paper about the failure of economic policy under Gordon Brown.  This graph was key, showing how much spending has increased compared to the pattern in other OECD countries:

Spendingvsoecd
 
That increase in spending was so sharp that we entered the crisis overtaxed and borrowing too much.  Academic and official studies, cited in that paper, show that higher government spending is associated with lower economic growth over the long term.  Now huge government borrowing is undermining confidence and threatening higher interest rates.  The recovery isn't going well for Britain, we need to change our approach and start cutting spending so we can build a stronger economy.

Earlier this week, I wrote about how the manufacturing order statistics fitted the pattern of Britain having a weak recovery compared to the rest of Europe.  Even with the revision of the growth statistics announced this morning, the evidence still suggests we're not having a good time of it.

New Eurostat figures out today show that we are also facing high inflation relative to other European countries.  At an annual rate of 3.5 per cent, we're facing more than double the rate across the EU (1.7 per cent) and more than three times the rate in the eurozone (1.0 per cent).  Inflation is only higher in Poland, Romania and Hungary.

High inflation combined with anaemic growth is extremely bad news.  It means households are caught between rising prices and stalling incomes.  And high inflation makes it much harder for the Bank of England to maintain an expansionary monetary policy, which could undermine the fragile recovery.

One reason Britain is having such a hard time is that, as financial services are such a large share of our economy, we suffered a deeper structural shock than other economies, which got in trouble as demand fell globally.  But the economy was also woefully prepared for the shock thanks to poor Government policy.  At the very start of the recession, we produced a paper about the failure of economic policy under Gordon Brown.  This graph was key, showing how much spending has increased compared to the pattern in other OECD countries:

Spendingvsoecd
 
That increase in spending was so sharp that we entered the crisis overtaxed and borrowing too much.  Academic and official studies, cited in that paper, show that higher government spending is associated with lower economic growth over the long term.  Now huge government borrowing is undermining confidence and threatening higher interest rates.  The recovery isn't going well for Britain, we need to change our approach and start cutting spending so we can build a stronger economy.

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