14th February 2012
By the furore in the media discussing dramatic falls in inflation you might think that it is below target or even heading for negative inflation but in fact it will be above the inflation target of 2%. This is important for UK economic policy and I wish to explain why and discuss the current situation.
The UK economy
The latest numbers estimating UK economic growth came from the National Institute for Economic and Social Research a few days ago.
'Our monthly estimates of GDP suggest that output contracted by 0.2 per cent in the three months ending in January after a contraction of 0.2 per cent in the three months ending in December 2011……… These estimates do suggest that output has been flat since October 2011.'
Ouch! So a broadly flat economy since October according to their analysis. If we look at the underlying index they had UK Gross Domestic Product at 98.4 in January 2011 and at 98.7 in January 2012 (where 2008=100) which is pretty much stagnation. Looking forwards they are not exactly full of the joys of spring either.
'We do not expect output to pass its peak in early 2008 until 2014.'
The most recent official figures were also weak recording a contraction of 0.2% in the 4th quarter of 2011 and the figures below on a year before.
'GDP in volume terms increased by 0.8 per cent in Q4 2011 compared with Q4 2010'
Last night’s threat from Moody’s poses a warning for the future
For those unaware of the situation the ratings agency Moody’s announced this late last night.
'Moody’s Investors Service has today changed the outlook on the United Kingdom’s Aaa government bond rating to negative from stable.'
This seems more dramatic than it is in reality. You see I expect the UK to lose its AAA status and for us to probably do so in 2012. The UK Gilt or government bond market only fell slightly at the opening in response to this move. But the outlook expressed by Moody’s is not good either.
'the weaker macroeconomic environment……….a reassessment of the lasting effects of the financial crisis on potential output…….risks to the rating agency’s forecasts are skewed to the downside.'
Why does the economic situation matter?
Apart from it being important in its own right the state of the UK economy does have an influence on the inflation rate with a boom associated usually with more inflation and a slowdown with less inflation. Regular readers will be aware that my contention has been that the UK’s recent and indeed current inflationary episode is out of kilter with our economic performance as it has been too high.
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