Throw plan A overboard, George, and let Britain recover

When it comes to the economy, the coalition has nothing to be proud of. Surely it’s time for the Cha

This year's "ice-out" - when the ice that covers New Hampshire's Lake Winnipesaukee finally melts - was officially declared a month ago. In the winter, the ice gets so thick, one local man told me, that a jumbo jet could land on it. But once the ice goes, it's open season for fishing. Boats trawl with half a dozen lines behind them, using a variety of bait to catch the land-locked salmon and trout. That's what we went to do last weekend.

At first, we failed to catch a thing. Our captain, a typically superstitious fisherman, eventually identified the source of our bad luck - two bananas brought on board by one of our companions. Why bananas are unlucky remains a mystery (readers, please help), but once the pair of Musa acuminata were thrown overboard our fortunes did change for the better. If only a little.

Unhappy customers

Talking of bananas, David Cameron's and Nick Clegg's coalition - now a year old - has been failing consistently to avoid slippery skins over the past 12 months, from the hasty resignation of David Laws in May 2010 to, most recently, the embarrassment of Chris Huhne's penalty points. At least it appears that the government will execute a plan B on health reform.

It is becoming increasingly obvious that it needs to perform one on the economy, too. Take the "major announcement" earlier this month, in which the Prime Minister and his deputy assured us that they would tackle the youth unemployment problem by throwing some extra money at it. The sum committed was a trifling £60m over three years, which, by my calculations, amounts to a measly £20.77 per person a year.

Speaking for Labour, the shadow employment minister, Stephen Timms, claimed that the Department for Work and Pensions spends £60m on "postage and telephones" each year and he called the government's response "inadequate", which it is.

What has the coalition got to show on the economic front? No growth, falling real wages, widening inequality, weak trade figures, falling house prices and sluggish high-street sales, as demonstrated by the recent financial results from Boots, Mothercare and John Lewis. The Ernst & Young Item Club went as far as to ­predict that retailers will face a decade of tough trading conditions.

Perhaps worst of all is the collapse in "animal spirits" among both businesses and consumers, which I put down not just to the impending austerity cuts but to Cameron, Clegg and George Osborne, all three of whom are guilty of talking down the economy and falsely claiming that the country was on the brink of bankruptcy when they came into power. Such rhetoric will turn out to have been a major economic mistake and it's time ministers started to boost confidence rather than lower it.

The European Union's latest business confidence surveys in retail, industry and services showed sharp drops in April. There were also big drops in consumer confidence - in terms of people's own financial situations, the likelihood of their making major purchases and the general economic situation over the next 12 months. Interestingly, there was a substantial drop in the proportion of people who expect prices to rise sharply in the next year; this is now at the lowest level since October 2010.

The fear of inflation appears to be dissipating but the publication of GDP growth rates across Europe merely underlines the bleak picture
in the UK. Belgium, France, Germany and the Netherlands have had strong growth over the past six months of 1.5 per cent, 1.3 per cent, 1.9 per cent and 1.6 per cent respectively, compared to a depressing zero per cent for the UK. All four countries also experienced bad winter weather at the end of 2010. The moral of the tale: chuck policies that aren't working into the drink.

Deflated spirits

On 11 May, the Bank of England produced its latest inflation report, in which it revised down the growth forecast (again) and raised its inflation forecast. Members of the Monetary Policy Committee (MPC) would not have seen the latest CPI figure of 4.5 per cent, out 17 May, or the increase in the claimant count in April of 12,400, when they produced the report, but it makes interesting reading nonetheless, as the two fan charts (below left) demonstrate.

The top one shows what the market thinks will happen to interest rates over the next three years, assuming that the amount of quantitative easing remains unchanged at £200bn. The fans widen as time goes on, as it becomes harder to forecast.

The MPC's growth forecast (see lower graph) is more optimistic than those from other commentators. Capital Economics, for example, is forecasting growth of only 1.5 per cent in both 2011 and 2012. The MPC estimate stretches credulity, given that it shows little or no chance of negative growth over the next three years but a higher prospect of growth rates of more than 5 per cent. Even with such a bullish and questionable growth forecast, there is no expectation of inflation when the current burst, due to transitory factors such as January's VAT increase, disappears.

table

The MPC predicts a significant risk of deflation. Moreover, if there are further oil and commodity price drops - or if growth disappoints, as is increasingly likely - then deflation becomes ever more likely.

So far, the coalition's economic policies have been about as successful as my fishing trip. It's time to throw out the bananas, George.

David Blanchflower is NS economics editor and a professor at Dartmouth College, New Hampshire, and the University of Stirling