UK economy still vulnerable, says economist

The UK’s economy remains “very vulnerable” according to a leading economist.

 Speaking at a Pro Manchester economics debate last night, Barclays Wealth’s chief economist Michael Dicks warned that once public sector job cuts begin to bite next year, the number of people being put out of work would cause a drop in productivity that was equivalent to a 0.5% reduction in GDP.

Although he argued that a tightening of fiscal policy by the government had been needed to reduce the UK’s deficit “to prevent us from becoming another Ireland”, he said that the government had “gone for the jugular” in terms of the severity of the measures that are to be undertaken within the next year.

Arguing against any tightening of monetary policy by raising interest rates, Dicks said that concerns about any potential inflationary spiral should be offset against a weakening economy.

“So far, we haven’t had too much unemployment, but the average increase in wages has been 2% and the average increase in prices has been 4.5%. Most households are worse off, and that’s before you factor in worries about unemployment.”

Taking the contrary position, Pro Manchester’s chief executive John Ashcroft argued that it was better to show caution in monetary policy by tackling the UK’s increasing inflation early.

Ashcroft said that current monetary policy, with interest rates of 0.5% and a retail price inflation level of almost 5% “does not compute”.

He also said that the UK’s current export rate of 15% had been buoyed by weaker sterling, but that it made rapidly rising commodities even more expensive to import.

Ashcroft argued that a “cautious” 0.25% increase in interest rates in the short term would be better than attempting to control spiralling inflation in the longer term by having to increase interest rates by full percentage points.