The fragile state of the UK economy was underlined by the minutes of the Bank of England Monetary POlicy Committee's most recent meeting, released yesterday. Although the voting pattern stayed the same - just three of the nine-strong MPC voted for a rate hike (and one of them is leaving next month) - the Bank struck a rather gloomy tone on consumer spending, pointing out that all the usual surveys suggest consumption is weak and confidence is low. It also suggested there were some signs of people trading down from more expensive options - from restaurants to fast food, for example - or avoiding them altogether. The City concluded that this made an interest rate hike unlikely before the back end of this year (hence the pound took a beating yesterday).
The Bank wasn't much more cheerful on the subject of trade. Its theory was that the depreciation of sterling would not only help exporters; it would also reduce imports because domestic substitutes would become more affordable. But this hasn't happened; import levels have remained more or less the same, or even increased slightly. The Bank describes this as 'puzzling' (which is slightly alarming, since they're the ones who are suppposed to understand this stuff); their best guess seems to be that there just aren't enough decent domestic alternatives around.
Since the strength of the recovery has a direct impact on how much the Government needs to borrow - not least because it affects how much tax it collects - this is going to make the current 2011/12 borrowing target of £122bn a difficult one to hit. So all eyes will be on the borrowing figures for the next few months, as the austerity measures really kick in.
Still, let's finish on an optimistic note: the ONS said today that UK retail sales edged up 0.2% in March, confounding general expectations of another slide. So perhaps things aren't quite as bad as some make out...