OECD gives Government a headache over spending cuts

The OECD, one of the most vocal supporters of the Government's austerity drive, is now talking about slowing the pace...

by James Taylor
Last Updated: 19 Aug 2013
Just what George Osborne didn't want to hear this morning, after yesterday's news that the Q1 GDP estimate remains at 0.5%: the chief economist of the Organisation for Economic Co-operation and Development - previously a big fan of the Government's deficit-reduction drive - has told the Times that it might be time to consider slowing the proposed pace of cuts, in light of these feeble growth figures. Manna from heaven for the opposition - especially since the latest economic data doesn't really suggest that growth is going to perk up any time soon...

The OECD secretary-general Angel Gurria said in March that countries with a double-digit deficit need to move 'very fast, very decisively' and make their intentions abundantly clear. That's about as ringing an endorsement for the Government's proposed approach as you can get - and Osborne and co have made great political capital from it. So these latest comments to the Times - 'we see merit in slowing the pace of consolidation if there is not so good news on the growth front', Gurria said - will be about as welcome as a hole in the head (and an Ed Balls-sized hole, at that - always the worst kind).

The latest snapshot of service sector activity from the CBI won't do much to improve the Chancellor's mood, either. The good news was that business services firms enjoyed some 'modest' growth, and are expecting this to continue in the coming months (which should lead to the creation of new jobs). But for consumer-facing firms it was a very different story: hotels, bars, restaurants and so on apparently saw a 'sharp' decline in sales in the first quarter, with volumes hitting their lowest levels since November 2009. With the ONS suggesting yesterday that consumer spending contracted by 0.6% in the first quarter of the year (the second quarter in a row, meaning this bit of the economy is officially back in recession), that's hardly a surprise.

So it’s no wonder the OECD is worried about growth. But it seems odd that it’s also encouraging the Bank of England to start hiking interest rates – since that will probably constrain spending still further, and thus make growth even weaker. Seemingly, the OECD is of a similar mind to outgoing MPC member Andrew Sentence, who’s been telling the Guardian today that slower export growth is a ‘price worth paying’ to prevent an inflationary spiral.

Still, there’s a slight chance that this fall in consumer spending has been overblown – as the (slight) rise in retail sales during the same period would rather suggest. And there's a very decent chance that the bank holiday/ royal wedding/ early sunshine bonanza will have helped consumer-facing businesses enjoy a decent rebound in April. Osborne will certainly be hoping so - or the ever-increasing calls for him to take his foot off the austerity pedal are going to get even louder.

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