Thursday, 24 March 2011

Osborne's Moody Swings...

George Osborne has now had three tries, in less than a year, at addressing the problems in the economy: the June  2010 emergency budget, the autumn statement and yesterday's full annual budget statement.

Whereas the economy that Osborne took over was clearly the legacy of Alasdair Darling and Gordon Brown, the Chancellor has scorned the efforts of his predecessors and progressively put his own stamp on the economic situation: the economy of today is George Osborne's, and no-one else's.

The economy that Osborne took over was going through a slow and halting recovery with some growth in activity and a slowing of unemployment. Osborne took control with the vow to concentrate on growth. But since he has been in charge growth has stalled and unemployment has increased. Osborne also used the fear of the UK losing its "AAA" rating from the credit agencies as a prime reason for "cut fast and deep" strategy. We were in danger of losing our AAA rating, Osborne warned, and that would severely hamper any recovery by making debt more expensive to service, said George, so we had to be ruthless..

It is therefore ironic in the extreme that both the main credit agencies, Moody's and Fitch, have chosen today to issue warnings about the forecasts for growth that accompany Osborne's budget.

Moody's is clear about the problem:
"Although the weaker economic growth prospects in 2011 and 2012 do not directly cast doubt on the UK's sovereign rating level, we believe that slower growth combined with weaker-than-expected fiscal consolidation could cause the UK's debt metrics to deteriorate to a point that would be inconsistent with a AAA rating," 

Yesterdays' budget was seen by commentators as being broadly neutral: in other words, there would be no noticeable stimulus to the economy and there were no identifiable measures that would provide that growth, and it came on the back of weakening economic figures and pessimistic forecasts.

Osborne told parliament on Wednesday that the UK economy would grow by 1.7% this year, and by 2.5% in 2012, predictions which are still more optimistic than the latest assessment from the OECD, which  predicted last week that the UK would expand by 1.5% during 2011, and 2.0% in 2012.

Fitch, a rival credit rating agency, has already warned that Osborne may have to impose further austerity measures if GDP growth is slower than expected, or if inflation continues to run much higher than official targets.

Standards & Poor, the third main ratings agency, made noises in May 2009 about reducing the UK's credit rating, much to George's approbation.

Wouldn't it be ironic if all of George's efforts to appease the markets were to result in the very rejection by the markets that he has been using as the excuse for his extreme cuts strategy in the first place...???

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