FOR Gordon Brown, these are times of high anxiety. Today the Chancellor takes questions from MPs in the Commons for the first time in months as the economic outlook darkens and his reputation looks more vulnerable than at any time in his long stretch at the Treasury.
As Mr Brown rises to the dispatch box this morning, he will be braced for a barrage of questions over the deluge of bleak economic figures that has made the national mood grow steadily gloomier during his absence over the Commons’ long break.
Any hopes that the Chancellor might have had for some last-minute dose of really good news to toss at opposition parties eager to exploit the worsening economic climate at his expense were largely dashed yesterday by further setbacks.
First, the latest official data showed the number of people out of work and claiming benefits climb for the eighth month in a row, marking the longest sustained increases in unemployment since the early Nineties.
Then, the Organisation for Economic Co-operation and Development, the influential think-tank for the world’s 30 richest nations, reduced its forecast for Britain’s growth this year to just 1.7 per cent.
Both of these blows to Mr Brown’s once seemingly unassailable standing as an “Iron Chancellor” were tempered by more positive qualifications. Claimant unemployment is on the rise, but the overall number of people in work is also up sharply, to a record high. And while the OECD highlighted the sharpness of the present slowdown in the economy’s expansion — to less than half the 3.7 per cent annual rate notched up in the middle of last year — it also predicted some revival next year.
Still, the OECD’s forecast for this year’s growth was even more anaemic than the 1.9 per cent projected by the International Monetary Fund in Washington last month.
Nor did the Paris-based institution’s first report card on Britain for nearly two years spare the Chancellor some cutting criticisms over more fundamental shortcomings — over public finances, productivity, skills and living standards lagging behind those of Britain’s rivals.
The overall tone of the assessment from the OECD’s influential economists, who said that Britain’s past performance made it a “paragon of stability”, carried echoes of the warnings on Tuesday from Mervyn King, the Bank of England Governor, that, after a period of “great stability”, tougher and more testing times lie ahead.
Mr King made plain his reluctance to see the nine-strong cavalry of the Bank’s Monetary Policy Committee ride to the Chancellor’s rescue with helpful cuts in interest rates.
The Governor is worried about rising inflation being stoked by the surge in oil prices to near-record levels. There was, he said, a “false sense of our ability to maintain a smooth and steady growth of output”. Things were simply going to be more volatile. “Will the next ten years be as nice as the past ten? That seems rather unlikely,” he said — words to send a chill down any Chancellor’s spine.
Where does this leave Mr Brown? In just a few weeks he will face the Commons again to deliver his annual Pre-Budget Report (PBR). At the IMF last month he made clear that he now accepted the inevitability of a humiliating retreat over this bullish forecast of 3 to 3.5 per cent growth this year. But already the Treasury’s signals in Washington that this would be cut to “a bit less than 2.5 per cent” look too optimistic.
Since then, the bad news from the economic data has piled up ever higher, sending many of the City’s leading economists scrambling to cut their forecasts for the UK this year.
The last set of national accounts showed that GDP growth had tumbled to a year-on-year rate of just 1.5 per cent in the second quarter, Britain’s worst showing for 12 years. And much worse than expected data for production in the UK’s battered industry and on the trade gap have triggered predictions of still worse to come.
The National Institute of Economic and Social Research and a number of prominent analysts have tipped quarterly growth in the three months to September to drop to just 0.3 per cent. Others, such as Capital Economics, the consultancy, think that the figure could be 0.2 per cent, or even turn negative — to show the first drop in GDP since the last recession. This is not a prospect that the Chancellor will contemplate happily, threatening as it does his proud boasts of “no return to boom and bust”.
Mr Brown is likely to put the bravest possible face on the impending downgrades to his projections, while pinning as much of the blame as possible on soaring oil prices and a lacklustre eurozone economy.
The big question is, what happens next? The housing market downturn and surging petrol prices may have driven consumer confidence to its lowest for a year, leaving the nation’s high streets mired in the doldrums, but the OECD, like the Bank of England, is pinning its hopes on some pick-up in consumer demand next year to rekindle growth.
Some in the Square Mile, too, such as Robert Barrie, of CSFB, believe that the gloom among the City’s Cassandras is overdone. “Whenever the economy speeds up, it’s a ‘boom’. People always think as soon as the economy slows down, it’s a bust, and over the last ten years we have not been anywhere near either of those situations,” he said. “This economy has got a growth rate that the euro-area would dream about. We are doing fine.”
The Chancellor will be crossing his fingers that optimists such as CSFB are vindicated.
The OECD’s forecast of 2.4 per cent growth next year is dependent on stronger business investment and exports, as well as some consumer resurgence.
But it concedes that all these hopes remain at substantial risk. Even then, it still expects consumer spending to grow by only 1.9 per cent in 2006, barely up from this year, and against 3.6 per cent in 2004. That does not augur well for the feelgood factor that Mr Brown will want to see return in time for his expected move to 10 Downing Street.
Meanwhile, the Chancellor remains dogged by the other looming issues that the OECD highlighted: over deteriorating public finances and the threat that taxes must rise; underperformance of the public services; and drags on the nation’s poor productivity from low skills, poor transport and mediocre innovation. It is an agenda that leaves him with plenty to fret about as he considers his legacy as the longest-serving modern-day Chancellor, and wonders if his luck has run out.
