Doom and Gloom ahead for the UK economy?

Recently released data seems to paint a rather bleak outlook for the UK economy as it tries to build a recovery.  The Office of National Statistics reported this week that the UK economy had only a meager growth of 0.2% in the second quarter of the year. This figure was lower than predicted but many economists actually thought that growth would be negative and that we would be slipping towards another recession. "One off factors" such as the royal wedding and the Japanese tsunami have been blamed for the negligible growth but to me these excuses are rather flimsy. To me it appears obvious that in times of global economic hardship, not enough is being done by the coalition to encourage growth. Yes, exports would have fallen due to the earthquake that devastated Japan and the country did grind to a halt as April appeared to be a bank holiday but can't Cameron and his side kick Clegg realise that their policies are having no effect.

The second piece of bad news came yesterday when Centrica, the owner of British Gas announced profits of £1.3bn in the first 6 months of the year, just as gas and electricity prices are set to rise substantially. With these goods being relatively inelastic, these price increases will tighten the squeeze on families who are already experiencing falling real wages. This will lead to a fall in consumption as individuals look to save what money they can and cost-push inflation as production costs will rise. 

With inflation well above the Bank of England's target of 2%, the possibility of higher cost-push inflation will put pressure on the Monetary Policy Committee to raise interest rates. If interest rates were raised, the fear is this would kill any growth as it would become more expensive to borrow money at a time when banks seem particularly unwilling to lend. 

This seems to indicate a double edged sword situation, if the BoE fails to raise the Bank Rate, inflation may rise out of control which would cause a breakdown in economic transactions as firms we unable to plan for future prices and costs. This begs the question, what do the BoE value more, economic growth or controlled levels inflation? 

Maybe the government help solve the problem. Instead of dodging the real issues that are affecting firms in the UK, they could use their power for good which would in the long run, help them gain the trust of the public. One idea could be to cut the level of National Insurance which employers pay. Although National Insurance is not classified as a tax by the government, it effectively is and so by reducing its rate, this would incentivise firms to hire employees and increase output. This would lead to a sharp increase in growth and would allow the BoE to set about bringing down the level of inflation without a fear of killing growth. Of course if it were this simple, you would like to think that the government would be setting about implementing the changes but surely it is a better idea than them resting on their laurels and seeing what the future brings. I'm sure that if the coalition listened to employers, they would echo what i have said. If the coalition turns a blind eye to the cries from the public, the future of the British economy doesn't look so bright.