A year of economic uncertainty lies ahead

The following 12 months will be the year where the consequences of policymakers' decisions and indecision are felt by all. Five questions will dominate economic discourse in 2011.

Will Straw reviews the economics of the year ahead

After the rollercoaster of the financial crash of 2008 and global recession of 2009, the last 12 months have been dominated by a fierce debate over the role of policy in delivering economic recovery.

In Britain, the Tory-led Government is pursuing a policy of fiscal austerity coupled with loose monetary policy. The industrial policy revolution, commenced by Lord Mandelson, appears to have ground to a halt with little – aside some would argue from a programme of corporation tax cuts – appears to be aimed at encouraging growth.

The following 12 months will be the year where the consequences of policymakers’ decisions and indecision are felt by all. Five questions will dominate economic discourse in 2011.

 

1) Can the private sector create enough jobs to more than offset the losses in the public sector?

The June Budget set out spending cuts of £22 billion in 2011-12 on top of the £5.2bn in 2010-11. Some of this will come directly through public sector job losses but the read across from the recent CIPD report suggests that 400,000 jobs could be lost next year in total.

If this happens, it will compound the bad employment news earlier this month. While the jobless total rose for only the first time in six months, employment has fallen for six consecutive months. Youth unemployment is another persistent problem while the number of people forgoing hours by taking on part-time work is at a record 1.16 million.

George Osborne’s economic philosophy, known as ‘expansionary fiscal contraction‘, suggests that the private sector will step in where the public sector is withdrawn. So far the signs do not look good. Even after a year of recovery, private sector employment growth has only been 296,000 – just 0.5 per cent. The key metric in 2011 will be whether unemployment does or doesn’t rise above 2.5 million.

 

2) Will rising inflation further erode living standards?

The Bank of England’s Monetary Policy Committee has effectively ignored rising prices in 2010 with inflation above target in every month. The increase in VAT to 20 per cent on January 1st and rising food and oil prices is likely to exacerbate the problem.

The Government has a perverse incentive to retain modest inflation since it erodes the value of government-held debt. And loose monetary policy is effectively acting as Osborne’s Plan B in light of the biggest fiscal policy tightening since World War II. But as inflation heads towards 4 or 5 per cent it also erodes living standards – especially as many people in work are facing pay freezes or reduced hours. The ‘squeezed middle‘ are particularly badly affected. The Resolution Foundation think tank have shown that real wages will fall for three years for this group. Expect growing calls for higher interest rates, if inflation stays above 3%.

 

3) Where will growth come from?

Economic activity comes from either consumption, investment, government spending, or net exports. The signs are not good. The most recent figures show that consumer confidence is at a 20-month low and likely to worsen following January’s VAT rise. The latest business investment figures showed a 0.2 per cent fall in the third quarter of 2010. We all know the direction of government spending which leaves export-led growth as the country’s main hope for growth.

George Osborne has talked up the importance of trade. The OBR has predicted a 0.7% contribution from net trade next year, reversing a 0.9% negative contribution in 2010. This view is not universally held. Simon Kirby, economist at the National Institute of Economic and Social Research, said “We think [the OBR’s] projection for GDP growth next year is still too strong given the weak prospects for Europe.” If further eurozone instability caused a further strengthening in sterling’s value, this could drive down exports. Duncan Weldon has set out an alternative and arguably more realistic strategy of “re-balancing domestic demand and, in the final analysis, being less import-reliant.” The first estimates of Q1 growth at the end of April will take on huge political importance coming as they do in the middle of the Scottish, Welsh, and local election campaigns.

 

4) What will happen to the eurozone?

Although the pain caused by the straight-jacket of euro membership is clear for all to see, a break-up could be even worse. In either scenario – weak members like Greece or Ireland leaving or Germany restoring the Deutschmark – “the costs would be enormous” according to The Economist. Former French Prime Minister, Laurent Fabius, predicted earlier this month that if Germany withdrew, the new Germany currency would “multiply in value by two compared with the present level” resulting in drastic consequences for German exports.

But the pain shows little sign of letting up. After Greece and Ireland, Spain has been warned that it’s debt may be further downgraded while Portugal is also in trouble. The head of the International Monetary Fund has said that EU leaders’ piecemeal approach to Europe’s debt crisis has encouraged markets to pick off weak countries one by one. EU leaders agreed to set up a permanent ‘bail-out’ system akin to a European Monetary Fund at the December summit, but no details have been provided on where the money will come from or how it will work in practice.

What happens matters for three reasons. First, as Britain’s major trading partner, there is little scope for export growth while the eurozone remains unstable. Second, further bailouts are likely to have fiscal implications for Britain. Finally, default in other European countries will have a knock on effect for British industry. For example, Spanish companies own Britain’s airports and a large portion of our banking sector.

 

5) What will China do?

Exacerbating, and in many ways overshadowing, domestic and regional economic uncertainties are the tensions between China and US. The spectre of currency wars overshadowed the G20 summit in Seoul. The US wants further Chinese appreciation of the renminbi while China is concerned about the impact of the US’ quantitative easing policy.

A meeting in mid-December between U.S. Treasury Secretary Timothy Geithner and Chinese Vice Premier Wang Qishan appeared to calm tempers. But the key question is whether both parties can be persuaded to accept a gradual, managed and peaceful transition of economic power and rebalancing or whether there will be flashpoints with unpredictable economic and political consequences. The ultimate economic power duel is unlikely to be resolved in 2011, but we should know more about the direction of travel as the year unfolds.

With thanks to Duncan Weldon, Adam Lent, Tony Dolphin, and Ben Fox.

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43 Responses to “A year of economic uncertainty lies ahead”

  1. BertromavichEdenburg

    A year of economic uncertainty lies ahead: The key metric in 2011 will be whether unemployment does or doesn't r… http://bit.ly/h3FBMD

  2. paulstpancras

    A year of economic uncertainty lies ahead | Left Foot Forward
    http://bit.ly/fhl5QL

  3. R Gordon

    RT @paulstpancras: A year of economic uncertainty lies ahead | Left Foot Forward http://bit.ly/fhl5QL

  4. Extradition Game

    RT @leftfootfwd: A year of economic uncertainty lies ahead – @wdjstraw looks ahead at 2011 http://bit.ly/dE8xen

  5. matthew fox

    2011 will see more cuts and more taxes rises, undermining the Government.
    Revenues will shrink and a double-dip recession is on the cards.

  6. Mr. Sensible

    I think this shows us again what a risk the government is taking.

  7. Trakgalvis

    RT @leftfootfwd: A year of economic uncertainty lies ahead – @wdjstraw looks ahead at 2011 http://bit.ly/dE8xen

  8. Hitchin England

    RT @leftfootfwd: A year of economic uncertainty lies ahead – @wdjstraw looks ahead at 2011 http://bit.ly/dE8xen

  9. AltGovUK

    RT @leftfootfwd: A year of economic uncertainty lies ahead – @wdjstraw looks ahead at 2011 http://bit.ly/dE8xen

  10. janie_s

    the ftse will hit a new high, confidence returns, public sector employment falls slower than forecast as private sector employment rises faster than expected. no double dip recession. the biggest problem is a collapse in the eurozone economy – a wholly EU caused problem.

  11. Mr. Sensible

    Janie I suppose that’s 1 way of looking at it…

  12. Éoin Clarke

    This is a good article which sums up the main risks well. I have been arguing for some time that the idea of printing money [$500bn US & £220bn UK] is coectively devaluing western currencies. It also means that inflation is higher than the BoE envisaged. With the restraint on wages that we are seeing, the increase in VAT, and the mooted proposed increase in interest rates, ordinary UK citizens are set for 6% inflation. Anyone unemployed or facing a 10% cut in their HB, is on course for a real terms decrease in their income of about 25%. Under any measurement, the poor, undercass, working class and lower middle class are in for a tough year. Notice I have yet to mention spending cuts. Why? Because there is simply no place for them. They will drain growth, make employment worse, and see the value of our homes continue to tumble. Osborne needs a plan b

  13. Lambchops

    A year of #economic uncertainty lies ahead: http://tinyurl.com/2afhgk7 #Unemployment #Debt #UKCuts #Inflation #Eurozone #Growth #China

  14. Mike Thomas

    Completely disingenuous article.

    a) Labour’s own manifesto policy for the economy was also expansionary fiscal contraction. Now after the election, Labour has no economic Plan A or Plan B.

    b) ‘loose monetary policy’, this is a bit rich coming from a Labour Party happy to condone M4 money growth of 15%+ during one of the biggest booms in living memory.

    I’ll make a prediction for 2011 – Labour aren’t not going to get their greasy mitts on the economy.

  15. matthew fox

    Glad to see the Happy news squad it out in force. Anyone who thinks forecasting 390,000 redundancies is good news, is missing the point. We where promised, that the private sector would take up the slack, yet they shed 2,000 jobs in Jul-Sept 10.

    On top of that, Petrol is forecasted to hit 135p a litre, crippling those drivers on low incomes, and the economy.

    Every organisation know to man is revising growth for the first half of 2001 downwards.

    I make my own bold prediction, DC will go missing when we hit 3 million unemployed.

  16. DrKMJ

    RT @leftfootfwd: A year of economic uncertainty lies ahead – @wdjstraw looks ahead at 2011 http://bit.ly/dE8xen

  17. Damien Clarkson

    RT @leftfootfwd: A year of economic uncertainty lies ahead http://bit.ly/hYxQrh

  18. The Squeeze

    … which leaves export-led growth as the country’s main hope for growth. (Will Straw)

    No, wrong. Net exports can be increased by decreasing imports. Squeezing consumers (who buy mainly foreign holidays and imported luxury goods with their spare cash) is one way to do this.

    Medicine time, open wide!

    “Why? Because there is simply no place for [cuts]. They will drain growth, make employment worse, and see the value of our homes continue to tumble. (Eoin Clarke)”

    There aren’t any cuts, government spending is due to increase next year and is coming in at 5% higher year on year since the coalition took over.

    As for your house price going down, that’s beyond parody. You are clearly one of these people that still fail to acknowledge that un-checked house price hyperinfation was what got us here in the first place.

    Also, if you care to download those helpful spreadsheets Mr Bernanke put up on the Fed’s website you’ll note he printed considerably more than $500bn, like 3 or 4 times more. US firms like GE are currently going on buy-out shopping sprees with it too, how funny is that!

  19. Extradition Game

    RT @leftfootfwd: A year of economic uncertainty lies ahead – @wdjstraw looks ahead at 2011 http://bit.ly/dE8xen

  20. Anon E Mouse

    Matthew Fox – The “Happy news squad” is only out in force because of this article from the “Delusional No Story Here squad”.

    The fact is the number of times the writers of these articles on this fine blog have been proven right is probably less than the 1.3% win the dithering Ed Miliband beat the better candidate by.

    What happened to the coalition falling apart by the close of 2010? The Double Dip recession? And on and on…

    Instead of the constant incorrect doom sayer speculation why don’t the contributors to this blog actually make their items “Evidenced Based”?

    Why not give that a try – oh and dump the current useless Labour leader at the same time…

  21. matthew fox

    @ Anon E Mouse

    Sticks and Stones old chap, Sticks and Stones, that is all you have in your locker.

    With the 80,000 PRIVATE SECTOR jobs losses predicted in 2011 alone, I seem to be struggling to find the good news in this announcement.

    I take it your aware, that the Government overshoot, it borrowing requirements in November, and Vat receipts where down 0.1%?

    Things are that bad, Grant Snape was complaining when public sector unions listed all the public sector job losses due at the beginning of next year.

    We are talking about a man who invented the term ” Spending Power ” and now is running away from the consequences of his actions.

    Why you need to bring up the election of Ed Miliband?, what has that got to do with the price of tea in china?

    The only dithering I see at the moment is people choosing whether to eat or leave their heating on, the only dithering I see, is the motorist who drives past a petrol station, and tries to work out, how they are going to pay for the next tank.

    If I was you, you should hang out at Conservativehome, they even allow swearing.

  22. Éoin Clarke

    1. House prices are now in double dip territory
    2. Growth for Q3 was downgraded
    3. VAT is about to hita generational high
    4. Inflation is stubornly high..
    4. Wages are in real terms less than inflation
    6. November saw record borrowing
    7. Unemployment took its sharpest spike since the recession ended
    8. Government spending is about to be reined in
    9. We have a looming Euro crisis on our doorstep
    10. Retail sales in Nov/Dec are very sluggish
    11. 60% of retailers expecting to do worse next year
    12. There are currently 87,374 public secotr redundnacy letters in the post
    13. Interest rates are set to start rising again
    14 Petrol in 2011 will break through to all all time high
    15. Growth forecasts have been revised down by every credible body

    Question:

    Should George Osborne have a plan B?

  23. Will Straw

    Happy new year everyone. A few comments in response.

    Mike – Labour had a policy of spending cuts but made no suggestion that this would lead to economic growth. David Cameron and George Osborne have claimed that cutting the deficit and growth go hand in hand. Fair point on (2) but this is not a Labour party blog and we weren’t in existence at the time of the last boom. I agree on your 2011 point. The next election won’t take place before 2015 IMO.

    Anon – Thanks as ever for the kind words about the blog. How about providing your own evidence. We publish a lot of stories on here but I don’t remember a single piece predicting that a ‘double dip’ would definitely take place. In fact unlike some on the left, we’ve been careful to point out that it’s unlikely. Similarly we’ve been consistent in suggesting that the Coalition would last a full five years and have focused instead on the anomaly of creating five year fixed parliaments.

    Eoin – Thanks for sharing that information. You paint a very depressing picture which reinforces the central argument that Britain’s economic policy is unprepared for the challenges ahead.

    Will

  24. Éoin Clarke

    Will,

    Thanks for that. Happy new year to you also 🙂

  25. william

    A year of economic uncertainty lies ahead.Private sector jobs,inflation,growth, the eurozone,China.To have ANY chance of winning the next election,the party must fill the present policy vacuum with proactive long term policies rather than short term sound bites, or still worse the present deafening silence.

  26. Anon E Mouse

    Will – Happy New Year fella and good luck in the new job.

    Matthew Fox – I don’t swear so Conservative Home wouldn’t suit me I’m afraid. You’re STILL doing the doom merchant what might happen stuff – predictions you call them.

    Let me give you my prediction Matthew. Labour will stick with the Son Of Brown Ed Miliband and will be hammered in five years time when a proper electable candidate will be elected and might give the party a fighting chance.

    No one on this blog will admit it, especially those clowns who voted for him – did you know Stephen Pound had 7 votes personally btw – heard him on Sky News last night. He’s a weird dud and you all know it.

    Have a great nee year all…..

  27. James Doran

    RT @leftfootfwd: A year of economic uncertainty lies ahead http://bit.ly/hYxQrh

  28. DrKMJ

    RT @leftfootfwd: A year of economic uncertainty lies ahead – @wdjstraw looks ahead at 2011 http://bit.ly/dE8xen

  29. janie_s

    Ed Mongoband is the worst leader since Donkey Jacket Foot. He may turn out to be worse. Having a foreign traitor and enemy of the British as a father isn’t a good start!

  30. Mr. Sensible

    “There aren’t any cuts, government spending is due to increase next year and is coming in at 5% higher year on year since the coalition took over.”

    I’m afraid we’ve heard that one before.

    I notice this morning that 1 of Cameron’s champions of the ‘Big Society’ is warning that it could be stifled by cuts.

    “What happened to the coalition falling apart by the close of 2010?”

    Well certain Lib Dem ministers seem to have done their best to make that happen recently…

    Happy new year everyone.

  31. matthew fox

    @ Anon E Mouse

    Well if I was you, I would get out of the prediction business, your grasp of economics seems pretty shaky. There is article on the Daily Mirror website, showing that any parent entitled to working tax credit, is going to lose £38 per month in childcare benefit, as from Apr 2011.

    Is that more good news that the country should celebrating?

    If you want to attack Ed Miliband, why don’t you say it to his face, this website isn’t a forum for your personal character assassinations.

    With all the personal bile directed at Gordon Brown, I thought Conservatives would have run out of venom, but looks like I am way off the mark.

  32. Chuka Umunna

    Useful summary of yr to come RT @leftfootfwd: A year of economic uncertainty lies ahead – @wdjstraw looks ahead at 2011 http://bit.ly/dE8xen

  33. Anon E Mouse

    Matthew – Firstly I have voted Labour my whole life until Brown was forced on the party – remember Full Third Term took party politics out last election. I will vote Lib-Dem next time mainly due to the fact that after 13 years of total control freakery from Labour I’d had enough and Cleggy seems reckless which is totally refreshing.

    It’s probably why Labour didn’t get a honeymoon bounce after the election of Ed Miliband.

    Scrub that. It’s because Miliband is so useless, weird and totally unelectable. I’m with the Labour MP’s here. I don’t go along with the fact his father was an ungrateful traitor to this country as some describe (he’s not responsible) or the fact he’s a tax avoiding property millionaire who’s only job was for the Countess Toff, Hariet Harman, it’s just that he represents every aspect of the worst in modern politics.

    He has NEVER done a single days work in his life so why does he believe he knows what’s best for this country? He didn’t propose it whilst in the treasury and he wrote the Labour election manifesto for goodness sake.

    As for the child benefit… unlucky. If by stopping Eric Clapton getting workers taxes he doesn’t need, winter fuel payments to ex-pats living in Spain and the rest of Labour money wasting then good.

    You display all that is bad about blind tribal political support Matthew and since I have paid my union subs to the T&GW since Bill Morris (in 1990 I think) and since they paid to Labour it gives me the right to express an opinion on the current opposition leader – who is useless.

    Which is bad for politics in this country when there is clearly no opposition to the government. Labour have elected the wrong man and you know it.  Everyone knows it and it took less time to realise than it did with Gordon Brown.  The longer he stays leader the longer Labour will be in opposition.  There’s no chance of winning an election in five years in any case but if Miliband hasn’t been swapped for his brother or Alan Johnson then it may become an 18 year thing again.

    Let me know where the hustings is with Miliband that isn’t controlled by police who arrest dissenters using the Terrorism Act, irrespective of their age and I’ll be there….

    Oh and until Brown starts appearing in the Commons as he is paid for then I’ll direct as much bile at him as I choose.  Courage? The man’s a joke and has made Labour a laughing stock. He’s also a public servant Matthew and this wasn’t North Korea last time I looked…

  34. Bernard and Paul

    RT @leftfootfwd: A year of economic uncertainty lies ahead – @wdjstraw looks ahead at 2011 http://bit.ly/dE8xen

  35. matthew fox

    @ Anon E Mouse

    Thank you for writing so much and not answering any of my points. If you think words like ” Useless ” and ” Weird ” are acceptable forms of debate, and your paranoia of being arrested, you should really consider Conservativehome, you will encounter like minded individuals.

  36. Anon E Mouse

    Matthew – I’m surprised you missed the point about Walter Woflgang – 86 year old lifelong member of the Labour Party who was arrested under the Terrorism Act for heckling Will’s dad, Jack Straw at the Labour Party Conference.

    Which points did you want answers to?

    (Useless and Weird is me being too polite to be directly offensive btw. Is Unelectable better? All three are true but I would hate to cause offence by my use of the English language. Do you REALLY think Ed Miliband has any qualities required by a Prime Minister Matthew?)

  37. Will Straw

    Anon – You’ve changed your tune. I thought you were a fan of Ed Miliband. Certainly you were high in praise of his early performances on this blog. What’s changed?

  38. matthew fox

    @ Anon

    Is I mentioned earlier, the PSBR ( That is the Public Sector Borrowing Requirement ) for Nov 10 came in at £22.8 Billion. The forecast for that month had been £16.8 Billion.

    The most worrying thing coming out of those numbers was that VAT receipts declined by 0.1 %

    The Government will end borrowing more money then it expects, meaning that there is even more cuts on the way, or taxes increases.

    If you look at our friends across the Irish Sea, you will know that they had a deficit reduction plan, and the damage it has inflicted.

    I think you hatred of Miliband and Straw Junior is not acceptable, and you really need to learn how to behave.

  39. ஜனார்தனன் Jana Mills

    not sure why we are celebrating 2011 will probably be a total disaster #cuts #tories #recession http://ow.ly/3wG56

  40. janie_s

    Remember Ed Miliband’s father Ralph’s attempted genocide of the British. He failed thank God – unlike his fellow travellers Stalin, Mao, Pol Pot etc. But if he were able, he’d have happily done unto the British what the Nazis did to the Communists.

  41. Anon E Mouse

    Matthew Fox – As a Christian I have no hatred for any man and you should publicly withdraw your assertion.

    It smacks of a typical Labour smear against my character and is unfair.  To suggest that I have anything against Will Straw is quite simply untrue.  The reason my business partner and I frequent this blog is because of his initial interview on Sky News which impressed us both. Ask him.

    I don’t care for your style of personal attack Matthew but would suggest that as a Labour supporter you are probably from the Damian McBride / Gordon Brown / Ed Miliband school of politics.  The fact is it is quite clear that Ed Miliband is simply not up to the job and to suggest that (from his performance so far) he is, is delusional and does the Labour Party no favours.  Blind tribalists like you do not help.

    Although it is HIGHLY unlikely that Labour would win the next election in any event, if that useless dud Ed Miliband is still at the helm it will be nigh on impossible.

    As for the situation in Ireland you show a simple lack of understanding of modern capitalism if you believe their “deficit reduction plan” is the reason for their situation. If you believe that to be the case you must be livid that they are going for even bigger cuts now.

    Finally please do not tell me how to behave when your posts are so dishonest Matthew.  And if Will Straw ever stands as a public servant I will exercise my freedom of speech to be critical or approving as I choose and won’t take any lessons from a Stalinist type approach that you seem to wish to inflict on others.

    Your posts are so New Labour it hurts….

  42. Tim Worstall

    Your answer to the question “where will the growth come from?” is “we dunno” and then you set off merrily to plan for the growth you have no friggin’ idea about?

    To be able to plan you need certainty but you’ve just admitted that not only are you uncertain you’re drifting in a fog of ignorance about the future.

    Come along now, you can’t all be as dim as this, some of you managed to share an A Level or something didn’t you?

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