Jitters over the recovery have out shone the worries over inflation as the Bank of England kept base rates at 0.5% for the 25th month in a row. We live in unprecedented times and if anyone doubted this then this months decision on interest rates and yet another domino falling in the Euro zone should confirm it.
There were those within 12 months of the credit crunch who were predicting that even then we were half way through the banking crises. Yet I believe that even now we are barely half way through, and unless the independent banking commission come up with significant banking reform then this crisis will continue to run.
The European Central Bank also decided to increase it’s base rate by a quarter to 1.25%. The markets were expecting the UK decision, but the confidence is draining away from the Euro as it struggles against the pound and the Dollar.
The massive structural problems with the economies of Europe is causing enormous strains that ultimately may only be resolved with a major restructuring, and a lot of pain to boot.
Northern Europe’s economy is in a far better shape than southern Europe – a 2 tier Euro zone is an inevitability. What is not an inevitability is whether the Euro will survive at all.
Meanwhile, the strengthening of rates in Europe could cause more inflationary pressure in the UK adding to the woes of the economy, growth and the pressure to increase base rates.
The markets are already factoring in the increase of 0.25% in May. The Elephant in the room however, is the growth of the UK economy. Analysts expected stronger growth in the first quarter of 2011, as it faltered with 0.7% growth, barely re-capturing the growth lost in the final quarter of 2010. Output has dropped and retail figures show despair by many high street companies.
To say that 2011 will be a tough year economically is an understatement. The cuts have barely bitten and consumer confidence is through the floor, with standards of living on a continuous slide.
Chancellor George Osborne is facing the worse case scenario with stagnant growth and output and rising inflation. Poor consumer confidence means people will not be spending in the months ahead and despite the rhetoric of having an investment and manufacturing led recovery, this takes years to achieve, hence why Germany is doing exactly what the UK government wishes the UK could do after years of preparation.
The structural problems in the UK economy will take at least a decade to overcome, but can the public stand that amount of austerity?