The Economy Today

Alistair Darling’s pre budget report ( essentially an emergency budget ) gambles that the recession will be all but over by the end of next year, with economic growth returning to positive territory by the third quarter.

I’m not so sure. My predictions have always been that recovery is unlikely until around May 2010, but what do I know? Well, all but one of my predictions over the last year have proven to be correct, which is more than can be said for any of the so called experts.

The chancellor’s bet depends on three risky gambles.
First, the British economy will recover as early as the second half of next year.
Second, the government can deliver a major clampdown on spending with huge efficiency savings.
Third, the electorate will support a significant rise in taxes targeted at the wealthy but which will probably hit those on middle incomes too.

If he is correct, then he will be hailed a hero, Labour will be re-elected and the economy will quickly recover. If he is wrong, the UK will be left with a hangover from this recession for decades - possibly having to call the IMF for help.

Wall Street dropped more than 5% today, dropping to it’s lowest level for more than five years, as US investors continue to panic.

October consumer prices fell by 1% on the month before - the biggest fall in 61 years and reinforces fears of a rapid slowdown.

Economists believe that this rapid fall in consumer prices has given the US central bank the room it needs to cut interest rates to battle the economic downturn and the Fed is expected to cut its key interest rate to 0.5% in December - it cut it’s rates twice in October down to 1%.

The fate of car makers Ford, GM and Chrysler is also still uncertain, as Chief executives from the three firms have been asking for an urgent $25bn (£16.6bn) bail-out package from the government this week as a “bridge” to help them survive.

Car makers were some of the biggest casualties in the markets today, with GM shares down by 15%.

Consumer Index figures show that the UK inflation rate fell in October to 4.5% ( from 5.2% in September) as food prices, transport costs and oil fell.

The Office for National Statistics stated that this was the biggest month - on - month drop in CPI figures for 16 years.

The largest drop came from transport costs, due to the reduction in fuel costs, triggered by the sharp fall in crude oil prices recently.

Meanwhile, The Bank of England believes that inflation could drop to below 1% next year, with the fear that we could actually go in to deflation - i.e. negative inflation. This would be a disaster for British businesses and the larger economy as a whole, so the liklihood is that the Bank of England governors will cut interest rates still further to try and stimulate trade.

So why is deflation such a bad thing? Well, it’s a sign that people aren’t spending. As people cut back on purchases, businesses have to slash their prices to encourage spending, thus cutting their profit margins and having to make cut backs on costs. This means that jobs are likely to be shed, leaving a greater drain on unemployment funds.

A further problem is that investors could see their dividends drop, making them more likely to sell up their shares, causing markets to crash still further.

Lower prices at first sound like a good thing, but lets hope they don’t drop by too much - for all our sakes!