Ross Walker, Senior UK economist, RBS
The fallacy at the heart of the current policy debate is that there exists a quick, pain-free fix: another round of quantitative easing, one more dose of fiscal expansion or a weaker pound to encourage exports.
Such demand-orientated thinking blithely ignores the massive stimulus already unleashed: 500 basis points of rate cuts, QE gilt purchases equivalent to a quarter of national income, a substantial depreciation in sterling and persistent fiscal deficits. The QE experiment was entirely justifiable given the severity of the financial crash, but it is hard to argue that monetary policy has been overly restrictive and the problem could be rectified by another say, GBP125 billion of QE.
Nor can ‘austerity’ be blamed as the principal cause of Britain’s stagnant growth. The deficit is being lowered at pedestrian pace – 1 per cent of GDP a year. In any case, the chancellor has very little leeway to offer significant fiscal easing in the Budget without prompting bond and currency markets to balk.
Unprecedented stimulus has offered dismal returns so far. Inflation has averaged 2.7 per cent since QE began, while real GDP has flat-lined.
Read the full article on the Markets and International website