The outlook for growth

Today Eurostat released growth figures up to the second quarter of 2010.  They suggest that Britain has been growing at a pretty similar pace to the eurozone (EA16).

Quarterly growth rates of GDP in volume, percentage change on previous quarter, seasonally adjusted

100902 eurostat0910growth

We are facing a stuttering and rather anaemic recovery.  But there is no sense in ascribing too much of that to particular conditions in Britain.  Our relative position is quite similar to that in the eurozone.  Similar issues are affecting the different world economies and an open economy like ours tends to be heavily dependent on growth elsewhere.  As Allister Heath notes in City AM, the major risk to short term growth isn't necessary spending cuts:

"The biggest short-term risk is not public spending cuts (which are vital) but a slowdown in the growth of the money supply. The amount of money held (mainly in bank accounts) by households and firms stagnated in July but grew at a decent annualised rate of 5.6 per cent over the last three months, suggesting pent-up demand for goods, services and assets. Non-financial companies’ holdings rose 0.9 per cent in July, pushing annual growth to 4.0 per cent. The corporate liquidity ratio (bank deposits divided by bank borrowing) excluding the struggling property sector is at the top of its historical range, implying continued corporate spending. As long as the money supply doesn’t fall back in the Autumn, the UK’s uncertain recovery ought to continue. Fingers crossed."

Dealing with a structural deficit of around £100 billion won't be easy.  But results from the Beacon Economic Forecasting model published by the TPA show that lower spending and lower taxes is the route to higher growth over the next decade.  As we found when we looked at academic and official research in this area, the massive increase in spending over the last decade is likely to be depressing trend growth by as much as 1.53 percentage points.

Spending cuts are essential to keep the public finances stable and minimise rises in our borrowing costs.  Over time, lower spending is also the best route to faster growth.

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