Bad news from the Bank of England puts the skids on Osborne’s slashernomics

11 08 2010

George Osborne’s slashernomics hasn’t taken long to start going awry.

This week has already seen house prices fall (without becoming affordable, as mortgage lending is squeezed) and retail growth slow markedly on last year.

Today it is likely to get worse. The Bank of England is expected to downgrade its growth forecast for the UK economy based on the impact of the government’s swingeing spending cuts.

Meanwhile the hike in VAT is expected to raise the Bank’s expectations for inflation when it publishes its quarterly inflation report today. Any rise in inflation will weaken the spending power of Britain’s consumers – whose confidence has been declining for three straight months – and will eat into the incomes of public and private sector workers who have been forced to accept a pay freeze.

The Times (subscription required) speculates that the Bank may bring its previous 3.5% growth forecast for 2011 down in line with the Office for Budget Responsibility’s 2.6% prediction.

If this is the case, the government may just claim the Bank’s revision reinforces the OBR figures, and by extension its forecast of strong private sector growth and falling unemployment over the next five years.

Critics of the government, however, will no doubt point to the growing risk of a double dip recession as a direct result of the coalition’s cuts.

If the economy does end up sliding back into recession, the prospects for the government (and the rest of us) are bleak. Thus the government’s opponents focus heavily on this possibility.

But at the same time, let’s not get too obsessed with double dips and headline economic growth. Unemployment, regional economic growth, poverty levels and the wealth gap are all equally important measures of the impact of the government’s economic policy. We shouldn’t let them forget it, less still forget it ourselves.

UPDATE: The Bank’s forecasts have now been published. Growth is predicted at below 3%, and Bank of England governor Mervyn King has warned that restricted commercial bank lending is holding back growth. The forecast views a double dip recession as unlikely, but warns that the economy faces a “choppy recovery” over the next two years.

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