I'm scared about the economy

by Ed Bowsher on 25 February 2011  |  10 comments
Tweet

The economic outlook is bleak.

It seems that the UK’s economic performance is even worse than previously thought.

Last month we were told that the economy had shrunk 0.5% in the final three months of 2010. That was very much a ‘first glance’ figure and some pundits suggested that things wouldn’t look so bad once the Office of National Statistics (ONS) had examined the data in more detail.

Sadly, it turns out that those pundits were too optimistic. The ONS has revised the numbers for the last quarter and it now says that the economy shrunk by 0.6% - rather than 0.5%.  Some of the shrinkage can be explained by the bad weather in December but the contraction is so large, you can’t blame it all on the snow. Tax rises and spending cuts are have triggered a slowdown.

You might be hoping that the economy performed better in 2011, but data from the CBI suggests that retailers have had a poor February while high street inflation was also on the up. Not good.

But disappointing retail sales aren’t the main reason I’m worried about the economy. What really concerns me is the situation in Saudi Arabia. I think there’s a real risk of revolution in Saudi and that could send the oil price through the roof. Big jumps in the oil price triggered recessions in the 70s and early 80s and I’m in no doubt we’d return to recession if there was serious instability in Saudi.

Of course, you could argue that an oil shock would be less damaging this time around because we’re less dependent on oil than we used to be – cars are more economical, for example.

There’s some truth in that, but only some. That’s because the likes of China and India are consuming far more energy now than they did 30 or 40 years ago. So higher oil prices will not only drive up inflation in the UK and US, they’ll also push up costs in China which will feed through to yet higher inflation in the UK.  That will increase the pressure on the Bank of England to push up interest rates which will then slow the economy down further.

Now, I admit that there was one piece of economic good news in January. The government’s tax take was unexpectedly buoyant, but that’s not enough to lift my gloom. Especially if we see instability in Saudi.

More:  Why business bosses are wrong about the cuts