Opinion: Is the UK economy doomed to stagnate? – Fresh Business Thinking

28/02/2013

By Stephen Archer, Business Analyst and Director of Spring Partnerships

The loss of the AAA rating from Moody’s would seem to cement the answer as a yes to this question — but it need not be so. Much as George Osborne may bluster the loss of credit rating, it shows that austerity policies alone will not suffice in the current economic malaise that is affecting most mature economies today.

Yes, there are those including Moody’s who are saying that the attack on the deficit is too timid — really? Just how much of a hole do we want below the waterline? The US and France have suffered downgrades and France may yet suffer more economic hardship — but the US is set for a steady recovery.

Why? In reality the US economic policy has differed little from the UK but the economy is structurally more flexible and efficient. Labour laws and other business ‘red tape’ are far less onerous in the US as are wage flexibilities. In the US a lot of manufacturing has been repatriated from China now with 50% of large businesses intending to ‘re-shore’ manufacturing.

The lessons of austerity are all too clear. It reduces wages, real income, spending power and GDP follows. Austerity does not drive growth other than in the very very long term — a time span we do not have the luxury of. This is even true when interest rates are close to zero. People are still de-coupling debt and businesses are sitting on cash because the economy is going backwards. Business confidence is very low. The situation is now also accompanied by an unhelpful inflation rate seemingly stuck at 2% and likely to rise thanks to the falling pound and rising cost of imports.

There is only one way out of this stagnation, a growth… continued on page two >