Wednesday, 25 March 2009

King correct to warn Labour against more spending

If Tuesday's bizarre outcome on the cost of living was sustainable it might, just might, reveal that the economy was stronger than we thought and demand had not completely evaporated but was still capable of applying some upward pressure to prices.

However, RPI at zero and CPI at 3.2pc reveal as much about flawed statistical measures as any change in how the economy is behaving. The inflation figures were strong only in the same way that a fish thrashing in the bottom of a boat can be surprisingly energetic, but not something that lasts.

The main reason RPI did not fall into negative territory (or deflation) and that CPI was still more than a full percentage point above the target 2pc level, was the weakness of sterling. We face the far more gloomy outcome of a shrinking economy with falling wages cursed by rising prices fuelled by escalating import costs. The reason for our weak currency? The disastrous state of the UK's public finances and the £118bn plus Alistair Darling will have to borrow in the next financial year.

A falling pound ought to be good news for exports but even our foreign earners won't be enough to help us out given how quickly unemployment is rising.

Falling housing and energy costs are welcome and will help matters. Being cheery, the best outcome will be only a short period of deflation which will be reversed as the economy picks up. I'm sorry if this sounds like wishful thinking but it's the best I've got. Mervyn King, Governor of the Bank of England, is a bit more upbeat, suggesting the benefit of recent interest rate cuts and its quantitative easing programme are still to come.

Whether you believe him or not on this point, King was right on Tuesday to warn the Government over further public spending splurges. Given the long term damage Labour has helped cause to the economy, and sterling, we really can't take much more punishment.
Bank-bashing policy flawed

Top bankers at Barclays saw £95m wiped off their share-based pay during 2007 and 2008. Bob Diamond saw his total pay fall from £21.1m in 2007 to £250,000 in 2008.

But let's keep the celebrations brief. Yes, City pay needs reform to align rewards with long term performance but at the heart of the Government's bank-bashing policy is a flaw.

It wants banks to take less risk and therefore pay their people less. But it also wants them to lend more, and take more risk. It can't have it both ways.

Source: Damian Reece, Telegraph

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