Around the world, unemployment is on the rise. The latest figures show it has hit 20.1 per cent in Spain, 13.3 per cent in Ireland, 10 per cent in France and 5.3 per cent in Japan, where industrial output surprised the market by falling 1.5 per cent in June on the previous month, missing expectations of a 0.1 per cent rise. Japan has suffered its 16th straight month of deflation.
Worryingly, the US also appears to be slowing again. On 30 July, the US commerce department published data showing that growth slowed in the second quarter of 2010 to an annual rate of 2.4 per cent, below market expectations of 2.6 per cent and down from an upwardly revised rate of 3.7 per cent in the first quarter. Data revisions also showed that the US economy shrank by 4.1 per cent from the fourth quarter of 2007 to the second quarter of 2009, compared to the 3.7 per cent drop previously on the books. Household spending fell by 1.2 per cent in 2009, twice as much as previously projected and the biggest decline since 1942. Consumer spending and personal incomes in the US also stagnated unexpectedly in JunOf great concern for Britain is the release of a survey showing that, while consumer confidence improved across the EU in July, it plummeted in the UK, from -11 to -17.
The most worrying data, however, is the "fear of unemployment" series, in which respondents are asked what they think will happen to unemployment over the next 12 months. The balance between positive and negative answers has averaged 25 since its inception in 1982 - the higher the number, the more people expect unemployment to rise. As the chart shows, fear of unemployment rose very strongly in mid-2008, just as the unemployment rate started to rise, but then fell back through early 2010 to a low of 30 in February. The balance was 35 in May, 40 in June and 54 in July. The last increase of 14 points is the second-largest in the series ever, behind an increase of 15 in January 1991, when unemployment was also 7.8 per cent and rising.
Data Source: European Commission
Clegg the Chameleon
The question is whether this rise in fear foreshadows a rise in unemployment. I believe it does. The public is becoming aware that the coalition government's economic plans will lead to a decline in jobs. Consumer spending will slow again as a result - double dip here we come. At some point soon, the downturn in the data may force Chancellor George Osborne to reverse course. And, if so, Nick "Chameleon" Clegg will no doubt tell us he was against fiscal austerity in the first place.
In his testimony to the Treasury select committee on 28 July, the Bank of England governor, Mervyn King, contradicted Clegg's previous claims that a discussion between them had convinced him to back the Tories' deficit reduction plans. Answering a question put by the committee member and Labour MP Chuka Umunna, King made it clear that, in his phone call with Clegg on 15 May, he gave no fresh information that could have led the Liberal Democrat leader to support draconian cuts in public spending and an increase in VAT - neither of which was among his party's policies during the election campaign.
Then, in the documentary Five Days That Changed Britain, broadcast on BBC2 on 29 July, the BBC political editor, Nick Robinson, asked Clegg if he had changed his mind about whether cuts were needed this year during the five days of coalition talks. Clegg replied: "I changed my mind earlier than that . . . firstly, remember between March and the actual general election . . . a financial earthquake occurred on our European doorstep." Asked why he did not convey this to the electorate before polling day, Clegg said that ". . . to be fair, we were all . . . reacting to very, very fast-moving economic events".
I talked to Umunna soon after the Treasury select committee hearing. "The Deputy Prime Minister's ducking and diving on this issue is extremely serious," he told me, "because a party's fiscal policy is a key indicator of its likely direction of travel in government. It is breathtaking that he knowingly stood on a platform from which he had moved some time before election day, but then reportedly failed to notify his shadow chancellor, let alone the electorate, that he had changed his position. How can people now trust anything he says?"
Those weren't the only blows to the coalition's credibility in the past two weeks. The Office for Budget Responsibility (OBR), set up by Osborne, was the subject of a devastating critique by the Swedish professor of international economics Lars Calmfors. His words carry considerable weight because he is the president of Sweden's counterpart to the OBR, the Fiscal Policy Council, and a former member of the committee for the Nobel Prize in Economics.
“Generating credibility for a fiscal watchdog means taking great care, from the outset, over its reputation," he said. "To rush things - by setting up an interim office before thinking about its role and the composition of its directing committee . . . had been completed - is the exact opposite of this. Instead, it seems to reflect the political convenience of quickly providing ammunition for swift fiscal consolidation."
Calmfors acknowledged that the proposals put forward by the OBR's outgoing chairman, Alan Budd, with the aim of putting some distance between the office and the Treasury, were "steps in the right direction". But, he continued, "they do not go far enough . . . It is not enough to reduce the number of Treasury officials working within the office. There should be none. Nor is it consistent with true independence to retain the current stipulation that the OBR may 'consult the Chancellor in preparing documents, but is not obliged to do so'. It should be explicitly forbidden to do so."
Because the OBR provides a forecast and a judgement on the fiscal outlook at the same time as the Budget is published, Calmfors argued, “it would seem impossible to avoid behind-the-scenes 'negotiations' on numbers with the Treasury". I agree. Calmfors is my choice to replace Budd as head of the OBR.
David Blanchflower is a labour economist and a professor at Dartmouth College, New Hampshire, and the University of Stirling