Firstly, a very happy New Year to everyone; clearly we will need all the good cheer we can muster to face 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. The present Tory-led Government is now pursuing a policy of fiscal austerity coupled with loose monetary policy. Diametrically opposed to the industrial policy revolution of the previous Government, this approach now appears to have all but ground to a halt with little, in reality, appearing to be aimed at encouraging growth.
The following 12 months will be the year where, as Ed Miliband pointed out in his New Year message, the consequences of policymakers' decisions and indecision will be felt by each and every one of us. The influential progressive blog, Left Foot Forward, has considered five questions that will dominate economic discourse in 2011. These questions will, no doubt, have a long-term effect on the pockets of local residents which, as intimated by Thoades in his Review of the year, will probably also effect the voting intention in the Broughton and Appleby ward in May.
- 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 ï¿½22 billion in 2011-12 on top of the ï¿½5.2bn in 2010-11. Some of those financial cuts will come directly from public sector job losses however the impact on the private sector, as shown in a recent Chartered Institute of Personnel Development report, could mean that as many as 400,000 jobs may be lost next year in total. When this "Public Sector/Private Sector job loss" knock-on effect happens, as it surely will, it will compound the bad employment news which has already begun to filter through. The jobless total rose for only the first time in six months in early December whilst employment had fallen for six consecutive months. Youth unemployment remained another persistent problem while the number of people forgoing hours by taking on part-time work is at a record 1.16 million.
George Osborneï¿½s economic philosophy, known as ï¿½expansionary fiscal contractionï¿½, suggests that the private sector will step in where the public sector is withdrawn. Yet, so far, the signs do not look good. Even after a year of supposed 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 doesnï¿½t rise above 2.5 million.
- Will rising inflation further erode living standards?
The Bank of Englandï¿½s Monetary Policy Committee has effectively ignored rising prices in 2010, which has seen inflation above target in every month. The increase in VAT to 20% and increased fuel costs this month, will add to inflation and can only exacerbate the problem.
The Government has a perverse incentive to retain modest inflation since it erodes the value of government-held debt. As such a loose monetary policy is effectively acting as Osborneï¿½s Plan B in light of the biggest fiscal policy tightening since World War II. But as inflation heads towards 4 or 5%, it also erodes living standards - especially as many people in work are facing pay freezes and reduced hours. The ï¿½squeezed middleï¿½ are particularly badly affected and the Resolution Foundation think tank have shown that real wages will fall for three years for this group.
- Where will growth come from?
Economic activity comes from consumption, investment, government spending or net exports. However the signs are not good. The most recent figures show that consumer confidence is at a 20-month low, and is likely to worsen following Januaryï¿½s VAT rise. The latest business investment figures showed a 0.2% fall in the third quarter of 2010. We are already aware of the direction of government spending, which leaves export-led growth as the countryï¿½s main hope for growth.
George Osborne has talked up the importance of trade. The Office for Budgetary Restraint 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. For example, Simon Kirby, economist at the National Institute of Economic and Social Research, says ï¿½we think [the OBRï¿½s] projection for GDP growth next year is still too strong given the weak prospects for Europeï¿½. If further Eurozone instability caused a further strengthening in sterlingï¿½s value, this could well drive down exports further.
- 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 of these two scenarios, ie, weak members like Greece or Ireland leaving, or Germany restoring the Deutschmark, the costs would be enormous according to reports in "The Economist" and from former French Prime Minister, Laurent Fabius, who predicted late last year that if Germany withdrew, the new German currency would ï¿½multiply in value by two compared with the present levelï¿½; resulting in drastic consequences for German exports.
But, in reality, the pain shows little sign of letting up. After Greece and Ireland, Spain were warned that their debt may be further downgraded; Portugal also has begun to show signs of problems. The head of the International Monetary Fund intimated that the EU leadersï¿½ piecemeal approach to Europeï¿½s debt crisis had effectively 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 to date no details have been provided on where the money will come from or how it will work in practice.
What happens in Europe matters for three reasons: first, as Britainï¿½s major trading partner, there is little scope for export growth whilst the Eurozone remains unstable; second, further bail-outs are likely to have fiscal implications for Britain and finally; default in other European countries will have a knock on effect for British industry. For example, Spanish companies own Britainï¿½s embroiled airports and a large portion of our banking sector.
- What will China do?
Adding to, and in many ways overshadowing, domestic and regional economic uncertainties are the tensions between China and US. The spectre of this 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 have poured oil on the troubled waters but still the key question exists as to 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. This is clearly the ultimate economic power duel of the early 21st century, but it is unlikely to be resolved in 2011. However we should keep a weather eye on this leviathan struggle as it unfolds because, as with the other questions, it will most definitely impact on all our lives - even here in North Lincolnshire. And that is a sobering thought!
Visit Scunthorope Editor's Note
This article drew heavily from an analysis first published at Left Foot Forward
. We ask all readers to ensure when quoting from sources that their permission is sought and that suitable acknowledgements are published as required. Excellent contribution mind you - many thanks, Paul (Thoades)