The UK economy seems to be quietly slipping back into recession. UK economy contracted 0.5% in the fourth quarter compared to the consensus of 0.5% growth. The previous quarter growth has also been revised down from 0.8% to 0.7%. On an year-on-year basis, GDP grew 1.7%. Looking at the release, most components of the economy is shrinking. Very ugly number indeed, but of course, they can blame the weather.
The situation in the United Kingdom seems to be very tricky. David Cameron and his coalition government has been determined to cut deficit, which will certainly hit the economy. The value-added tax (VAT) hike is not helping the situation as the Great Britain is having a stubbornly high inflation, now at 3.7%. With the VAT rise in-place, inflation is set to rise to 4% or more this month.
With the poor economic data coming in, it is certainly not helping Mervyn King, the Bank of England Governor. The consistently high inflation is already hurting the credibility of the Bank, and with this ugly GDP number, all these give very little leeway for the Bank of England to make policy decision. Increasing interest rate will probably plunge the economy back into downright recession, but cutting interest rate (if it can still be cut) or increasing asset purchase programme will only spark higher inflation. In other words, the Bank of England is facing a dreadful stagflation scenario.
The coalition government will be under pressure as well. Over the past months or so, every Wednesday at the Prime Minister’s Question Time (PMQ), whenever the PM David Cameron was asked questions about the economy and deficit, David Cameron will point his finger to Ed Miliband, the Leader of the Opposition, and say:
The Labour [Party] left us with this mess.
Certainly, while in opposition, David Cameron bashed Gordon Brown for not answering the questions. Now, Ed Miliband bashed David Cameron for not answering the question. Certainly the Labour isn’t happy. Ed Balls, the new Shadow Chancellor, recently bashed George Osborne, the Chancellor of the Exchequer, that the idea of the previous Labour government left the Tories with this mess is nothing but absurd. Now, as the economy is shrinking, Labour might be getting an upper hand again.
Tomorrow, we will see another Prime Minister’s Question. It will certainly be a good fun to see what David Cameron is going to say about this ugly GDP number.
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