G20 talks stimuli - as car sales rise again

As the G20 hit London, news that at least one part of the stimulus package is having the desired effect.

by
Last Updated: 31 Aug 2010

Finance ministers from the world’s richest countries are descending on London today, and top of the agenda will be stimulus packages – specifically, whether we should be ramping them up, or scaling them down. The head of the IMF has already spoken out about the dangers of the latter, but there are plenty of others who seem to be in favour of the idea. So it’s a bit hard to see them reaching any kind of consensus. Although Alistair Darling will at least be able to point to the success of the UK car scrappage scheme – which boosted sales again last month – as proof that the British approach is the right one…

The ministers, who are meeting ahead of the full G20 bash later this month, seem likely to agree on the importance of maintaining growth, but disagree on the details. In the big countries that are officially out of recession – like France, Japan and Germany – thoughts are turning to how governments are going to unwind these huge stimulus packages. But laggards like Britain (the economy best equipped to handle a downturn – TM G Brown) seem to be in favour of more spending. Gordon Brown, Angela Merkel and Nicholas Sarkozy may be happy to agree on capping banker bonuses, but the larger point remains a bone of contention.

The good news for Britain is that the IMF has actually done us a favour by agreeing with Gordon (as opposed to making him look bad by telling everyone how knackered our economy is, like the OECD did yesterday). Boss Dominique Strauss-Kahn has warned that ‘unwinding the stimulus too soon runs a real risk of derailing the recovery, with potentially significant implications for growth and unemployment’. He also said that policy-makers should start thinking about exit strategies, to be fair, but we suspect the Treasury will brush over that bit.

And it’s true that at least some of the stimulus measures are having an effect. Take the car scrappage scheme, in which the Government bribes (sorry, encourages) people to dump their old cars and buy a new one. Car sales were up 6% in August, following a 2.4% gain in July – a clear sign that the scheme is having the desired effect (although admittedly they were still 15% below the average for the previous ten years).

On the other hand, we’re not sure this is necessarily a good example. Since we don’t really own many car companies these days, most of the profits will end up out of the country. And if this scheme is artificially propping up the market, it makes it all the more important to work out what’s going to happen when this prop is removed. Brown and co probably don’t want to think about how we’re going to unwind this massive boost (and since they’re likely to bequeath this to the next lot, perhaps that’s not surprising). But we’re with Dominique on this one; not working out the location of our reverse gear doesn't really sound very sensible.


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G20 talks stimuli - as car sales rise again
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