‘Winter is coming’ for the economy

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In a speech to parliament on 17th November, David Cameron warned that a dark winter is coming for the global economy. It is no secret that the Eurozone and Asia are struggling, but the UK economy has been doing rather well of late with growth at 3% and ever-falling unemployment. The Prime Minister has declared, however, that “red warning lights are flashing on the dashboard of the global economy”. So does he have a right to be worried? Or are darker forces at work here?

David Cameron page 6 - DFID - UK Department for International DevelopmentWith the general election only six months away it is safe to assume practically everything that David Cameron says has some form of hidden agenda behind it. While he cannot deny that the global economy is struggling, it is his explanation for and solution to it and that reeks of political manipulation. His explanation? That it’s nothing to do with him or his austerity measures. His solution? Do nothing. Or more accurately “stick to our long term economic plan”.

In this regard, Mr Cameron is stuck between a rock and a hard place. With the election looming he is fully aware that he cannot renege on his economic plan for fear of being labelled a hypocrite but he is also conscious of the fact that he cannot sit back and hope that a stuttering global economy will not affect the UK. And so he has resorted to politics. By announcing that the world is struggling but he will change nothing, the Prime Minister achieved nothing of any substance. That is, other than ensuring that if the worst comes to the worst then the electorate know that any hardship they face is not his fault.

But is he entirely blameless? Not entirely, no. The countries struggling most currently are those that implemented deficit reduction plans similar to the UK. Germany staggered by on 0.1% growth in the third quarter while Japan entered recession on the day that Mr Cameron warned of the future. The Germans’ staunch commitment to reducing debt has left them on the brink of a recession that would cripple the fragile European economy. Meanwhile in Japan the economics of Prime Minister Shinzo Abe have fallen apart. Upon his election in December 2012, Mr Shinzo launched an ambitious plan to lift Japan out of a 20-year battle with deflation. Billions was pumped into the economy and by mid-2013 it was once again strong. It is at this stage that Mr Abe decided to join his Western counterparts and start reducing sovereign debt. He announced the first tax rise in Japan for nearly 20 years. Implemented in two phases, sales tax is to rise from 5% to 10%. Since the first phase was introduced in April 2014, the Japanese economy has experienced two consecutive quarters of negative growth and has entered recession.

Both of these countries made a grave mistake and David Cameron may have just joined them. They failed to recognise the importance of confidence. Faced with a struggling economy and the threat of deflation, German companies have matched their debt-fearing government and have stopped investing. This is a worrying development in such an export-reliant economy and its crumbling infrastructure is an apt metaphor for the state of confidence in the country. In Japan, Mr Abe made the error of acting too swiftly. As Japanese companies benefitted from the recovery, rather than passing the higher profits on to workers in the form of increased wages, they retained the extra income, lacking confidence in the future. When they were hit with a sales tax, the Japanese people faced a fall in real income and so stopped spending.

As the UK election approaches, polling shows that the economy is a declining issue for voters. This recent announcement by David Cameron is an attempt to bring it back to the forefront of voters’ minds and cast doubts about whether a Labour party still haunted by the financial crisis is capable of leading the country in times of economic fragility. However, in playing politics and remaining stubbornly supportive of the austerity plans, the Prime Minister may have worsened this fragility.

Confidence is a delicate commodity and must be treated with respect. As the UK economy has begun to recover, Mr Cameron has hit it with his damning prediction of the future. In the same way that confidence breeds more confidence, talk of doom often leads to doom. That is, if anyone pays attention to it. The best way to avoid the dark winter awaiting us is to embrace the Christmas spirit and spend, spend, spend. Resting on our laurels and watching the nights close in won’t get us anywhere, despite what Mr Cameron may think. Besides, who even listens to politicians anymore

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About Author

Liam Gowing is an Economics student. He writes about British national politics.

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