STING IN THE TAIL

Some people think cows are fearsome creatures, although they are largely docile. But I know from my farm upbringing that the sting is in the tail. A good clonk on the head from a heavy muck laden tail can knock you senseless.

I fear it may be the same in our economic recovery. There are early signs that by the end of the year the economy will have stopped contracting, even though that still means several months of pain and job losses to endure. At the G20 meeting there was much agreement among world leaders about the broad thrust of global policy. There are signs that the housing market is spluttering into life; estate agents report an increase in sales (although at reduced prices) and the “sold” signs around our streets bear testimony to that. The banks and building societies are starting to lend again, thankfully in a more prudent way than the past 10 years, meaning that buyers may have to lower their sights in terms of what they can afford. The crucial US economy shows some tiny flutters of encouragement. We should be able to look forward to a bumper year of tourism down here as many turn their back on the expensive euro-zone and holiday at home.

I hesitate to use the expression green shoots, but maybe there is a faint light at the end of the tunnel.

So where is the sting in the tail? I am worried about 2010 and beyond. The Bank of England has now released £75 billion into the economy that should not by rights be there, by the autumn interest rates will have been at a historic low for nearly a year, and government spending (and borrowing) is at an all time high. All of this extra money sloshing around the economy could well spark off inflationary pressures next year the like of which we have not seen since the seventies. It depends how quickly policy makers apply the fiscal brakes when the recession is over.

Past experience of the Bank of England suggest that they are likely to react at least three months too late. (I would certainly oppose any more printing of money if Parliament got a say on it, which it doesn’t.) And we have the small matter of a general election between now and June 2010 which would make it hard for any government to apply the necessary unpopular correction in time. Oh dear!