British Policymakers find themselves stuck in a Predicament as they try to Tame Mounting inflation Amidst a Weakening Economy. Well, all they need to do is to Focus on Supply side Policies rather than looking at Demand Side Tactics to solve The Problem.
It was just three months ago when British policymakers were on cloud nine. After all, silencing several critics United Kingdom’s (UK) economy had performed above expectations (UK’s GDP grew 2.7% in Q3, 2010 following a 1.6% expansion in Q2, 2010) and was finally out of the devastating recessionary storm that had been thrashing it since Q4, 2008 (when its GDP first contracted by 2.1%).
Even as per the Office of National Statistics (UK), this was the best six-month growth rate (Q2 & Q3 combined) that UK’s economy had recorded since H1 2000. The outstanding performance was even more noteworthy given the uncertainty associated with the public finance and the emergency budget, which dominated the first half of 2010 and had the potential to damage economic activity.
Come Q1 2011, and UK’s economy has once again surprised the economists! However, this time the smile has vanished from the faces of British policymakers who are stuck in a predicament as they try to tame mounting inflation [which is at 3.7% at present and is likely to rise above 5% in the coming months, way above Bank of England’s (BoE) inflation target of 2%] amid a weakening economy [which unexpectedly contracted by 0.5% on a quarter-on-quarter basis in Q4, 2010].
In fact, rising inflation continues to worry British policymakers, who are still struggling to find a way out of this catch-22 situation. According to the minutes of the monetary policy meeting last held on January 12-13, 2010, six members voted in favour of holding interest rates, while three voted against. Of those three, two members voted to raise interest rates by 25 basis points, one more vote than in previous months.
No doubt, the most logical move for British policymakers to curb surging inflation under normal circumstances would have been to boost interest rates and go for monetary tightening. But then, considering the dismal numbers posted by the economy during Q4, 2010, doing so might send the economy back into recession. Agrees Melanie Bowler, the London based Economist at Moody’s Analytics, as she tells B&E, “With the risks weighted firmly to the downside, the chances of the UK economy slipping back into recession in 2011 are really high.”
In fact, a closer look at the numbers and one would surely agree to Bowler’s logic. While manufacturing capacity utilisation in UK has slipped to 79% in Q1 2011 (this is below the euro zone average of 80% and well below the 84.9% reported for Germany) from 79.3% Q4 2010, weakening recoveries in key trading partners in the euro zone will continue to drag on demand for British exports. Services, which account for around 67% of the GDP, also continue to put pressure on UK’s economy and shrank by 0.5% (q-o-q) in Q4, 2010.
Even as per the Office of National Statistics (UK), this was the best six-month growth rate (Q2 & Q3 combined) that UK’s economy had recorded since H1 2000. The outstanding performance was even more noteworthy given the uncertainty associated with the public finance and the emergency budget, which dominated the first half of 2010 and had the potential to damage economic activity.
Come Q1 2011, and UK’s economy has once again surprised the economists! However, this time the smile has vanished from the faces of British policymakers who are stuck in a predicament as they try to tame mounting inflation [which is at 3.7% at present and is likely to rise above 5% in the coming months, way above Bank of England’s (BoE) inflation target of 2%] amid a weakening economy [which unexpectedly contracted by 0.5% on a quarter-on-quarter basis in Q4, 2010].
In fact, rising inflation continues to worry British policymakers, who are still struggling to find a way out of this catch-22 situation. According to the minutes of the monetary policy meeting last held on January 12-13, 2010, six members voted in favour of holding interest rates, while three voted against. Of those three, two members voted to raise interest rates by 25 basis points, one more vote than in previous months.
No doubt, the most logical move for British policymakers to curb surging inflation under normal circumstances would have been to boost interest rates and go for monetary tightening. But then, considering the dismal numbers posted by the economy during Q4, 2010, doing so might send the economy back into recession. Agrees Melanie Bowler, the London based Economist at Moody’s Analytics, as she tells B&E, “With the risks weighted firmly to the downside, the chances of the UK economy slipping back into recession in 2011 are really high.”
In fact, a closer look at the numbers and one would surely agree to Bowler’s logic. While manufacturing capacity utilisation in UK has slipped to 79% in Q1 2011 (this is below the euro zone average of 80% and well below the 84.9% reported for Germany) from 79.3% Q4 2010, weakening recoveries in key trading partners in the euro zone will continue to drag on demand for British exports. Services, which account for around 67% of the GDP, also continue to put pressure on UK’s economy and shrank by 0.5% (q-o-q) in Q4, 2010.
Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
For More IIPM Info, Visit below mentioned IIPM articles.
IIPM Best B School India
Management Guru Arindam Chaudhuri
Rajita Chaudhuri-The New Age Woman
IIPM's Management Consulting Arm-Planman Consulting
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
For More IIPM Info, Visit below mentioned IIPM articles.
IIPM Best B School India
Management Guru Arindam Chaudhuri
Rajita Chaudhuri-The New Age Woman
IIPM's Management Consulting Arm-Planman Consulting
