Neither alive nor dead, the UK economy is in limbo land, staggering along courtesy of taxpayer billions, low interest rates and a short-term VAT cut
Welcome to the zombie economy. Banks stagger along courtesy of large slugs of taxpayer money. The housing market is puffed up by the lowest bank rate in history. The Treasury's time-limited VAT cut and cash-for-clunkers is providing a temporary boost to consumer spending. Yet the economy continues to struggle. Neither alive nor dead, this is limbo land.
Let's recap. The Bank of England's announcement today that it was creating another £25bn of electronic money over the next three months took the total to £200bn. There is no suggestion that the Bank rate – pegged at 0.5% since March – will be raised soon. The recession (the longest since modern records began in 1955 and on course to be the deepest since the Great Depression) has decimated tax revenues and will leave the public finances in the red by £175bn-plus this year.
And what have we to show for all this? Not much. The cocktail of cheap money, quantitative easing and deficit financing has arrested the economy's decline but that's about it.
The quantitative easing programme involved Threadneedle Street buying government bonds from the big financial banks in the hope that banks would use the extra cash to boost lending to small businesses and individuals.
But lending to these groups is going down rather than up: instead of helping the real economy, QE has allowed the commercial banks to play the casino economy. Asset prices – shares, commodities, property – have all been booming. Given that it was an asset prices bubble that got us into this mess in the first place, this is hardly progress.
Some City economists argue that quantitative easing would have been more successful in boosting lending had the Bank widened the scheme to include private-sector securities in addition to gilts. There's also a case for following Sweden's lead and charging banks for money left on deposit at Threadneedle Street.
Ministers would be unwise to take comfort from recent upbeat data. True, factory output was up by 1.7% in September but that followed a 2% drop in August. Car sales are up by almost a third on the depressed levels of a year ago but the improvement has been concentrated at the cheap end of the market, with owners of old cars taking advantage of the £2,000 on offer to trade in cars bought before 2000. But the car scrappage scheme and the 2.5 point cut in VAT have the effect of boosting consumption today at the expense of weaker spending in the future.
Unless Alistair Darling announces tax cuts or spending increases in the pre-budget report later this year, fiscal policy will be tightened next year. Growth in real incomes will be eroded by the short-term spike in inflation caused by a higher oil price and the return of VAT to 17.5%.
A seventh quarter of falling output is unlikely. Frankenstein's monster will come twitching back to life in the final three months of 2009, but the outlook for 2010 is not good, with sluggish growth at best and a double-dip recession a real threat.
Copyright Speakers Corner 2017