Nida Ali, an economist, talks to Shaun Cumming about the outlook for the British economy.
Q: Is the government’s austerity drive working?
A: I think this is a difficult one to answer, but the deficit does need to be reduced.
There is a significant risk [for everyone] if this situation is allowed to go out of control, but the government also has to make an effort to promote growth and consolidate public finances.
I think that under the circumstances, the government is doing the best that it can do but spending cuts have had an effect.
This is evident in the public sector more than anything, which has the knock-on effect of disrupting the labour market. I think we can see this feeding through to other parts of the economy as well, so it certainly seems to be taking a toll.
It is unclear how the situation can be redressed because these tough measures need to be taken to prevent public finances from spiralling out of control. This is a risk that is too high.
We are relying on the fact that bond yields are as low as they are and we need to keep this intact. I am not sure what they can do to prevent the cuts from being as deep as they are at the moment.
Q: How has the eurozone crisis and other outside factors affected the British economy?
A: We can see that the problems within the eurozone are definitely having an effect on the British economy. We think the longer the eurozone crisis remains unresolved, the more chance there is of Britain suffering a prolonged recession.
It is unfortunate but there are numerous headwinds buffering the British economy.
Q: What needs to be done for the situation to improve in 2012 and for confidence to be restored in the markets?
A: The most crucial thing is for the European authorities to take decisive action to prevent financial contagion from spreading to the other peripheral eurozone countries like Portugal and Ireland and avoid defaults there.
Their initial plan to expand the EFSF [European Financial Stability Facility] seems to have fizzled out. But recent talks of moving towards a fiscal union is encouraging and clearer action on this front may help to calm financial markets. (Q&A continues below)
Q: Did the autumn statement by George Osborne, the chancellor, tackle the key problems?
A: Unfortunately, it was rife with bad news with regards to forecasts and other factors. I think the chancellor did the best that he could in targeting the key parts of the economy, which need to be looked at, including consumer spending and the youth unemployment situation.
[Osborne] certainly focused on the right parts and came up with some encouraging and appropriate measures.
Q: Why is the British consumer so cautious in the current environment – is it purely confidence or are there other factors?
A: There is definitely a confidence issue here as households focus on lowering their debt burdens. But when you look at the current economic background as a whole it is not solely an issue of confidence.
We can see that consumers are suffering from the eroding of real incomes because of inflation being so high and wage growth being so muted. So, clearly confidence plays a part but there are so many hard factors affecting consumers.
Something that we expect might happen in 2012 is that the problem might ease slightly because we expect inflation to fall and the measures announced in the autumn statement should start taking effect.
Q: How can the problem of unemployment be resolved?
A: I think that the private sector is going to need to pick up the slack to help improve the labour market situation.
As we know there is very little movement in the pubic sector right now, so it basically comes down to companies releasing more funds and investing.
Companies are strengthening their balance sheets at the moment, but it is up to the private sector to release cash and invest. I think this is where there is potential and where we are not seeing enough being done to help ease the problem.
Q: Are the government’s credit easing initiatives helping? Can they do more to boost employment figures?
A: We see the credit easing plan as a tactic that we are not entirely sure is going to be as effective as it could be. The plans outlined do not really seem to be enough to get the private sector back in motion. The banks need a lot more than the stimulus provided to start releasing this money and lend.
Q: In 2011, several one-off factors have been blamed on low growth. Is it fair to blame these types of events for the state of the economy?
A: If you look at the many factors we have experienced in 2011, of course they will have an effect on an economy, but at the root of the problem is that the underlying economy is already so weak.
The fact the economy is so fragile means that one-off factors can help to push the economy downwards – especially when we are in a situation when we experience very low growth, or even negative growth.
One-off effects shouldn’t usually have such great effects as they have had this year – so in that sense they are excuses.
Q: Do you think Britain is heading for another recession?
A: While we still expect the British economy to continue growing, albeit modestly, downside risks dominate the outlook and the possibility of a recession cannot be ruled out.
The longer the eurozone crisis persists, the higher the probability there is of Britain seeing a full-blown recession. To prepare for this households are likely to increase their precautionary savings and reduce spending.
This will force companies to lower production and reduce staff numbers to increase efficiency and protect profit margins.
Nida Ali is an economist at Oxford Economics where she is part of the macroeconomic forecasting team.