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But if you are worried about British fiscal policy take a look at American or

Posted on 28 September 2010

But if you are worried about British fiscal policy, take a look at American, or Japanese, or French, or German – and cheer yourself up.The more fundamental general point the IMF is making is that next year will be a year of somewhat slower growth: still plenty of growth, but just not as much as at present. It has cut its global forecast to 4.3 per cent, a touch lower than it estimated in April, and down from an expected 5 per cent this year. That would still be higher than the long-term trend rate of growth of 4 per cent. The principal risk, looking ahead, is oil.The various economic models suggest that a $10-a-barrel rise in the oil price knocks a bit more than 0.5 per cent off global growth. I don’t think we should be too mechanistic about this, though. What it does do is to hit Asia, the fastest-growing region (with the fastest growing demand for oil) harder that the rest of the world. It is also likely, because this rise in the price is mostly a function of higher demand, rather than reduced supply, that the price will stay high for longer than in the past.Pull together the performance of the UK economy – strong but slowing soon – and the world economy – strong but slowing – and what do you have?I think that we cannot rely on strong external demand through next year from the world economy We may well get it if the IMF is right.

The new Economic Outlook from the International Monetary Fund, out yesterday, rather supported this view, being somewhat critical of Gordon Brown’s spending and borrowing spree. Traditionally they have been wonderful, pumping out large and growing surpluses year after year The service sector seems likely to continue to do so. But we are also relying on income from foreign investments, which has soared in the past three years but which traditionally has been quite volatile. I have just been looking at the annual balance of payments statistics for last year: the investment income surplus was £22bn. Without that we would be in serious balance of payments trouble.So there is an obvious danger that the economy has just become artificially pumped up by borrowing, public and private. But we don’t seem to be there yet.The big issue as far as the balance of payments is concerned is how secure are our invisible earnings. We hit that constraint in the late 1980s and could do so again.

The trade deficit was enormous, as usual, but the current account deficit, at £6.4bn, is pretty steady at 2.2 per cent of GDP (right-hand graph).Yes, there must be a balance of payments constraint on growth at some point – the point at which productive capacity lags so far behind domestic demand that imports are sucked in to fill the gap. Also out yesterday were the new balance of payments statistics for the second quarter. One of the reasons has been the apparently endless ability to generate more service-sector growth. However, no one as far as I know has suggested that the overall growth rate could be more than 3 per cent. So things do have to slow down in the coming months.On the other hand, the not-too-bad performance of the current account in recent years would give some comfort to the idea that the economy can grow towards the top end of the range.

New figures out yesterday confirmed that gross domestic product (GDP) in the second quarter rose by 0.9 per cent, equivalent to an annual 3.6 per cent. That is a clear percentage point above the long-term growth trend and shows a solid recovery from the period of slower growth a couple of years back (see left-hand graph).The growth is driven by services, as the middle graph shows. Having a large and successful services sector has helped insulate the economy from the effects of the global downturn, though it is encouraging to see that manufacturing has started to grow again, albeit slowly.We don’t really know what the long-term growth potential of the economy is now. People used to reckon on a 2.5 per cent maximum, but in the past few years the possibility of 2.75 per cent is being talked about.

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