It was Harold Wilson the UK Prime Minister who said “A week is a long time in politics” and I am sure that David Cameron and George Osborne are both thinking this bit would never dream of saying it!
Was the loss of the triple A rating an overture to a triple dip?
Triple A rating lost
At the beginning of the week Moody’s down graded the UK’s triple A rating to a double A1, the triple A rating had been one of George Osborne’s key measures and retaining it had been an election promise.
In reality the loss of a triple A rating has actually not been a calamity for countries that have lost those – in fact borrowing for the US has become cheaper. The strange thing is that the agencies such a Moody actually do not have such a goo d record – it was their high rating of the derivatives that led to the banking crisis that put us all in the mess we are in.
However the markets are driven by sentiment and there has been a down grading of the credit rating of many other UK institutions, including the BBC, so even if the cost of borrowing for UK Plc. has not been greatly effected the cost of borrowing of many other UK institutions has been.
The value of the pound has also dropped against the dollar – which is never a good sign, but might stimulate exports.
Purchase Managers’ Index (PMI) – Tips the balance
I guess that just as the politicians had finished their sighs of relief when a real body blow came from the PMI figures released on the 27th of February indicating that the Eurozone retail sales showed a record year on year fall. This influential report from the market analysts MARKIT influences the financial planning of major businesses who will have reduced their economic forecasts for the next period, it was this that triggered the specter of the Triple Dip recession.
The Political Penalty
Just to round off the week for Cameron and Osborne the electorate had an opportunity to vote on their government at the Eastleigh by-election. While the Lib Dems retained the seat the Conservative candidate was beaten into third by the Ukip candidate.
However the Conservatives have tried to shrug this off as a protest vote – which is probably right as the Labour party, the only real alternative in government, gained very little. However the result must be good for the Lib Dems as it shows that their supporters clearly can differentiate them from their coalition partner. However we still have a long wait for a general election to see the real political fall out from the economy.
Comment: If the medicine is not working…
It appears that Osborne believes that we need more austerity even though there is now clear signs that it is not working. The government is making much of the capital projects such as the high speed rail link HS2 from London to the North actually the majority of spending will fall in the next government. I also believe that the government is grossly underestimating the impact on the economy of their welfare cuts. Increasingly poor families are looking to charity run food banks for support, if there are increasing numbers of food banks handing out free groceries – what is the impact on the economy?
The problem is always where does the money come from? Each year the government has to borrow money to balance the books – so the idea of cutting expenditure to reduce borrowing is sound providing cutting expenditure does not also cut income. So far the government cuts have done this, although employment level is not as bad as expected, the tax take has reduced because wages have gone down and so has high street spending. This looks a bit like a downwards spiral to me and I think it will get worse unless the government starts giving the economy a real stimulus in the form of a cash injection – this could be in spending today on infrastructure so there is a trickle down to the lower level of the economy and increase tax takes and family spending or by direct government intervention through welfare spending, if the very poor families were buying groceries rather than receiving charity they would be contributing to the economy.