News that the UK is undergoing a double-dip recession has put chancellor George Osborne under massive political pressure to change tack on the economy and do more to encourage growth.
With economists warning over the weekend that the country may even experience a triple dip recession if the eurozone crisis pulls the UK back next year, some have gone so far as to say that austerity must end altogether.“Consumers are unwilling or unable to borrow and corporates refuse to invest. In these circumstances it is up to the government to boost its own spending plans,” said Greetham (pictured right), director of asset allocation at Fidelity.
“Borrowing your way out of recession isn't as mad as it sounds. With ten year gilt yields at a record low 1.5 per cent, the markets are sending a clear signal that there is substantially more headroom for counter-cyclical fiscal stimulus.”
“If the economy responds, an increase in tax revenues should more than repay the additional cost and a rise in wages will help the consumer to grow into their debt.”
“So far with austerity, the reverse is happening. We are saving our way into debt. Keynes would shudder."
Greetham’s comments will resonate more due to fears that ratings agencies Fitch and Moody’s could strip the UK of its AAA credit rating. Both companies have the country on a negative rating watch.
However, rival ratings house S&P has taken the opposite opinion, confirming the country’s top mark for creditworthiness and saying the austerity package was crucial to it retaining the status.
Darius McDermott, managing director of Chelsea Financial Services, believes the chancellor has no choice but to continue with his austerity measurs.
He commented: “The austerity package is probably what’s saving the UK’s AAA rating. At least it seems we are attempting to do something about it, which isn’t the case for some other countries.”
“The next big challenge is to stimulate growth, but that’s not easy in a period of mass deleveraging. I think we have to accept we are in for a prolonged period of no or low growth due to the massive paying down of debt by governments and households. I don’t think the policies of Osborne or anyone else would make too much difference.”
The position of George Osborne came under pressure last week, with some national opinion polls suggesting the majority thought the Chancellor should step down.
The majority FE Trustnet readers disagree, however. Almost two-thirds of 761 respondents to a poll said they believed George Osborne would remain in the role at least until the end of the year.
Simon King, manager of the Premier UK Strategic Growth fund, says he wouldn’t be surprised to see the economy claim the scalp of the Chancellor and even the Government.
He said: “I would not be surprised to see Osborne ditched at some point as a sacrificial lamb if things do get much worse, even though he is quite close to Cameron.”
“We have been used to two or three-term governments but I think that’s changing. You are seeing it already in Europe in countries such as Greece, for understandable reasons. Electorates are getting tired quite quickly. That may be a feature of the next decade.”
“However, Osborne really hasn’t got any options. Apart from the nuclear option of saying ‘I don’t care about the ratings I’m going to inflate my way out of it’ – which is similar to what the US is doing – he really doesn’t have any choice.”
“There’s really little he can do if he wants to retain the AAA rating.”
King says that in the longer term the government should be looking to foster certain favoured industries, explaining that a laissez-faire approach is more appropriate to a time of economic calm.
However, in the shorter term he sees no realistic other option. “It’s Plan A or Plan X,” he said.