The UK isn’t holding up at all badly – we’ve so far avoided any periods of stagnation or contraction. The USA screeched to a standstill at the end of last year and has since started to recover, while Japan and continental Europe are now getting into trouble (the French, German and Italian economies all shrank in 2008Q2). By contrast, UK growth has slowed but not – yet – severely.
It also occurred to me to have a look at inflation over the last year. I can’t find up-to-date data for Japan (although their inflation has for years been much lower than other rich countries’), but here are the figures for the UK, the Eurozone and the USA across the last 12 months (CPI, % change on a year earlier):
Again, the UK looks unremarkable by contrast; there’s been a general inflationary surge over the year. During this period, the rate of inflation has risen by 1.5% in Germany, 2.3% in Italy, 2.6% in the UK, 2.7% in France, 3.1% in Spain and 3.6% in the USA.
And the future? Last week, the Bank of England issued its latest quarterly report. Its central projections are quite gloomy: for inflation to go “substantially higher over the next few months” and for growth to slow to near-zero by the end of the year. But there are two glints of a silver lining.
First, the projection is that, in the new year, inflation “falls back sharply to a little below the 2% target in the medium term” as the recent leap in food and energy prices works its way out of the system. Second, and a bit more technically, these are projections, not predictions: the Bank is saying not that these things will happen, but that they will happen on certain assumptions. Most important of these assumptions is that the Bank’s base interest rate “moves in live with market expectations, which are for [it] to be roughly constant over the forecast period”.
Given the time taken for interest rate changes to affect inflation, and the fact that inflation is now projected to fall much more dramatically from early 2009 than most observers had thought, this strongly suggests that interest rate cuts will before long be on the cards in order to avoid an inflation undershoot in late 2009/2010. The further consequence of such rate cuts would be higher-than-projected GDP growth in 2009.
To mix metaphors: we’re not yet out of the woods, but it’s darkest just before the dawn, and there’s light at the end of the tunnel.
2 comments:
Good post. Other thing about the USA is that their recent growth is presumably because of the stimulus package - whether or not they have started to recover depends on whether this can be sustained once people have spent their stimulus cheques.
Yes, despite the collapse in US growth late last year, they managed to avoid a recession thanks to tax and interest rate cuts; by contrast, the ECB has prioritised inflation by holding rates firm and even raising them recently.
Result being that the Eurozone has seen a smaller inflationary jump than the USA but is now doing worse for growth.
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