If we are not careful, we’re all in danger of talking ourselves into a r********. I steadfastly refuse to use this word, one we are hearing with increasing frequency from the economic doom-mongers. Let’s consider some facts and try to restore some rational thinking!
Firstly, the Bank of England’s Monetary Policy Committee doesn’t (at the time of writing) think the economy is in dire straits otherwise it would have cut interest rates in January. Until the minutes are released we won’t know what the breakdown between doves and hawks was, but it is clear to see the majority chose to wait and see.
Secondly, take the recent hullabaloo from the high street retailers. Sir Stuart Rose clearly believes we are hanging to the economic precipice with our fingernails. But if that were the case, then surely M&S’s 2% like-for-like dip in Christmas sales would not have been met with a 20% share price drop, leading many market analysts to suggest that M&S simply got its strategy wrong. Other retailers enjoyed robust sales – including Sainsbury’s and John Lewis. Of course, M&S’ (and others’) predicament is not exclusively down to incorrect strategies - undoubtedly the slowdown is driven by consumer caution. As house prices stagnate, and fall in some places, consumers feel less affluent and start to rein in spending. But they are not slamming on the brakes. The employment picture remains positive: according to the Office of National Statistics we now have the lowest unemployment since 1975.
It’s true that factory output continues to decline and the trade deficit is widening. We are increasingly dependent on imported energy and food - prices of which are rising far quicker than the overall rate of inflation. It is this that enables the MPC the wiggle room to factor in a rate cut in the next few months if required without unduly driving up inflation. Whilst some retailers would have liked them to panic and over-react they didn’t. The mild slowdown which has started and which the Bank is looking to sustain will contain inflation. But again I stress this is slowdown, from growth of around 2.5-3% to 1.5-2% and not the dreaded R-word (which is two consecutive quarters of negative growth).
I’m not saying we haven’t anything to worry about, but we must guard against self-perpetuating negative thinking that could turn a slowdown into a serious downward spiral.
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