Outside the eurozone, Britain has had the freedom to run her own monetary policy and allow sterling to fall substantially.
While European governments struggle to put in place credible fiscal plans and obtain parliamentary and public approval for them, George Osborne has been clear and decisive and has so far pulled the coalition, if not the public, along with him.
The chancellor has become an unlikely poster boy for international bond investors and for the ratings agencies which not so long ago were casting doubt on Britain’s AAA sovereign debt rating.
The question is whether this could be about to change, and not just because European leaders staved off the immediate crisis. On Tuesday the Office for National Statistics (ONS) will unveil the second quarter’s gross domestic product (GDP).
I can remember the days when it was hard to get a quorum of journalists for the GDP briefing, let alone a media scrum, complete with live television coverage from Church House, Westminster, which the official statisticians have booked.
Treasury officials, who will not see the figures until tomorrow, are nervous, particularly about the prospect of a negative number, which would resurrect all the arguments about whether the government’s fiscal strategy is condemning the economy to long-term stagnation.
In any event, however, Labour will have a story to tell about the economy’s performance under the coalition. A flat figure, with no revisions to earlier data, would tell us the economy had grown just 0.6% over the past year, and not at all over the past nine months. Osborne may have reason to be grateful for parliament being in recess.
There are excuses. The royal wedding bank holiday, Japan’s impact on worldwide manufacturing and some exceptional falls in energy production have weighed down temporarily on growth, as poor weather did at the end of last year.
The Treasury points to the impact of high oil prices, the 40% increase in the sterling crude price since last year being potentially responsible for a drop of 0.4 or 0.5 percentage points in growth this year.
Independent forecasters have just revised down their average growth forecast to 1.3% for this year, compared with the 1.7% the Office for Budget Responsibility (OBR) was predicting in March. A year ago, its forecast was 2.3%.
Growth is disappointing. A bit of disappointment, however, is a small price for getting the budget deficit down.
This is why the latest numbers for the public finances were interesting and potentially worrying. In June the public sector’s net borrowing was £14 billion, up from £13.6 billion in June last year.
For the first three months of this fiscal year, 2011-12, borrowing was £39.2 billion, only a whisker below the £39.5 billion total for the corresponding period of 2010-11. This is a year when borrowing should be falling significantly, as throughout the parliament, by about £2 billion a month compared with a year earlier.
It is not happening. Borrowing is at best stuck at the levels of a year earlier. The pain, it seems, is in vain.
The OBR, the government’s independent fiscal watchdog, monitors and comments on the public finances each month. It still has faith in its prediction of £122 billion borrowing for this year, down from £142.1 billion in 2010-11.
Timing differences, it says, will help. This time last year the Treasury had received the £3.5 billion proceeds of the bankers’ bonus tax but the bank levy that replaced it will not flow in until the July figures, which will bear close analysis. Higher oil prices and new North Sea taxes will provide a mini revenue windfall, while in January the government can look forward to the proceeds of the 50% top rate of income tax through the self-assessment figure.
It remains possible, despite a disappointing start, that the government will hit its deficit targets. Logic would suggest, however, that weaker growth must mean higher public borrowing. If growth is so weak as to preclude any reduction in the deficit, Britain will be stuck at first base.
So growth is needed. That is why the past few weeks have been worrying. The economy needs the “animal spirits” of businesses investing for the future. The turmoil unfolding in Europe, and the worries over America’s debt, have meant a rational business response has been to stay under the duvet and hang on to their cash.
This is where it could get worrying. Ross Walker, an economist with Royal Bank of Scotland Financial Markets, points out in a report, UK Investment, that the economy is approaching a pivotal moment.
Corporate Britain exited the recession in good financial shape. Businesses, particularly larger ones, rather than consumers or government, are the main hope for domestic demand over the next couple of years. Put simply, if firms do not invest, the domestic economy will stagnate.
Investment intentions surveys suggest they will, and RBS has factored in a bounce from now on. Overall investment should rise more than 6% next year, it predicts.
But Walker is worried about another possibility. “Our concern is that the deterioration in some of the most timely indicators – either financial market gauges or survey measures of business confidence – hint at an imminent deterioration,” he writes.
Were this to result in projects being axed – or even just postponed – the expected trajectory for growth would need to be scaled back. Confidence in the UK fiscal framework might then be tested, prompting a damaging rise in yields and an inflationary slide in sterling.” It might not happen, but it could. Pivotal indeed.
My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.
This post originally appeared at David Smith’s EconomicsUK and is reproduced here with permission.