And it gets worse. Unemployment, currently at 2.65 million, is going to keep creeping up, hitting 3 million this year and staying at that level for at least three years. Inflation’s inflating too: CEBR has revised its forecast for the final quarter of 2012 to 2.7%, up from the original 1.7%. And there’s nothing that our economists or the Monetary Policy Committee can do to stop inflation rising.
‘[It’s] the worst possible hand of cards, says Scott Corfe, senior CEBR economist. ‘Almost any decision the Committee makes will be wrong from at least one point of view. They will probably hold base rates for two more years at least and stop further QE. But even that may not be enough to keep inflation near target or get economic growth at a reasonable rate.’
And the problem doesn’t lie solely within the UK. High prices and the rising demand for oil and other commodities in the Far East economies are the biggest drivers of UK inflation these days. Any quick fixes could land us in yet more hot water too, as think tank CEO Douglas McWilliams explains: ‘We could only opt out of this by pushing up the exchange rate to a level that made the UK even less competitive. So it looks as if inflation above target is a price we may have to pay for a period.’
And we’re already feeling the effects of this rising inflation. The Spending Power Report from Lloyds TSB out today shows that households have £113 less a year to spend compared to 2011. Prices across the board are rising at their fastest rate since records began in June 2010 at 6.2% per year, it reckons, so we’re set to be even more out of pocket as time goes on.
And it’s not just households experiencing a shortage of cash. According to the Bank of England’s Trends in Lending data, the amount borrowed by SMEs has contracted massively over the past three months, shrinking by about £9bn across the quarter. In February, the net monthly flow of lending reached its lowest ebb in almost two years. Without investment, business growth will remain muted. And, with the government plunging every spare penny into reducing the deficit, there are no revenue generators left to get GDP growth going.
So where does this leave the UK economy? The consensus from CEBR is that we’ll have to grin and bear it for at least four years until the global markets flatten out. But for George Osborne, desperately trying to get our house in order in record time, this will be a bitter pill to swallow. Lie back and think of England, George, we’ll see you in 2016.