This It’s the week of the Autumn Statement. On Wednesday the Chancellor will set out the Tories’ best shot at trying to regain the public’s trust that they will be sensible custodians of the economy and they won’t bludgeon them into the ground with higher taxes.
So it is about politics, and my word, there is a bit of a climb ahead there.
But it is also about economics, and here there is a different challenge. It is knowing what on earth is happening to the UK economy right now, and beyond that, how it will be affected by the wider global trends next year.
On the politics, there is not much that is worth adding here. Jeremy Hunt has managed to rebuild global confidence that the Government won’t do anything that scares the financial markets – rather important since it has to borrow a lot of money from them.
Sterling is steady, up a bit against the dollar a year ago at $1.24, and almost exactly the same against the euro at €1.14. Gilts yields are up on a year ago, with the ten-year rate just over 4 per cent, but that is a good bit lower than the equivalent US rate and well down on a peak of 4.7 per cent in August. And if he does things next week that are deemed ‘populist’, that is surely better than policies that are ‘unpopulist’. The problem is not credibility. It is growth.
Tasty: But boosting long-term economic growth won’t be a piece of cake
We will get a set of economic forecasts from the Office for Budget Responsibility together with an assessment as to whether the Chancellor’s plans are consistent with the Government’s long-term objectives. But we know the forecasts will be wrong. That is not to get at the OBR, which has good people on it. The problem is the quality of data they receive.
You may remember how the Office for National Statistics recently found that the economy was substantially larger than it had been reporting. All that stuff about the UK having the worst performance of the G7 since the pandemic was rubbish. So the OBR has to try to bake a cake without being able to weigh the ingredients.
Unsurprisingly the cake wouldn’t win any prizes. Back in March the OBR forecast that the budget deficit for the first half of this fiscal year would be £102 billion. It turned out to be £82 billion. To be £20 billion out is quite an achievement. What I think is happening, looking at the strong tax receipts, is that the economy is not stagnating as the GDP figures suggest, but growing steadily, if slowly. We do have a growth problem, but it is not as bad as it looks.
Boosting long-term economic growth is not something that can be tackled by a speech in Parliament. It will be a five-year slog, and I suspect removing roadblocks to growth will be more important than rather fiddling around with tax incentives, as governments so often do.
But thinking about next year, what will really determine the progress of the economy will be what happens outside Britain.
For a start, will there be a world recession, led by the United States? A lot of people in America think there will be one there, though fears have faded a bit in the past two or three weeks. The question is whether the US will have a ‘soft landing’. Goldman Sachs thinks they will. Others think it be a hard landing, AKA a recession. One of the governors of the Federal Reserve, Lisa Cook, said the risks were evenly balanced. The truth is that no one knows, but what we do know is that old adage. If America sneezes, Europe catches a cold.
What will happen to energy prices? It was the surge last year, particularly of natural gas prices, that greatly increased consumer inflation. Autumn gas prices are stable, while the oil price at $80 a barrel on the Brent measure is down a bit on a year ago, though much higher than it was before Russia’s invasion of Ukraine.
How quickly will central banks bring down their interest rates? The Bank of England may be independent from the Government of the day but it is not independent from global markets. If the Federal Reserve starts cutting its rates early next year, and the European Central Bank follows suit, that will give headroom for us to start cutting rates too.
I worry that the Bank of England has squeezed too hard, and that the lagged effect of its increases in rates will start to do unnecessary damage to businesses and homebuyers alike. But we can’t cut rates until the others do.
So when Mr Hunt stands up in Parliament on Wednesday, be aware that what he says will matter to us, of course. But what happens in the world will matter more.