Double dip? What double dip? On the face of it, today's news on the economy suggests that fears of a renewed recession are overdone.
The number of people claiming unemployment benefit fell for the sixth month in a row and the 184,000 rise in employment in the three months to June was the biggest since 1989.
Although the Bank of England downgraded its economic forecasts, it still expects the economy to expand by just below three per cent next year. But of course the real threat — both to employment and the overall economy — is yet to come in the form of the huge fiscal squeeze.
The Office for Budget Responsibility is forecasting about 600,000 public sector job cuts in the next few years, while we think that the number could be closer to 750,000.
We continue to expect unemployment to get to three million in 2012. And we think that the Bank of England is too optimistic about the ability of the private sector to compensate for the fiscal squeeze. We expect GDP growth of just 1.5 per cent in 2011.
The chances of an outright double dip recession still look relatively small. The biggest danger is that the Monetary Policy Committee raises interest rates at the same time as the Government is tightening fiscal policy, a double whammy for consumers.
But today's inflation report hints that we will be spared a rate hike any time soon. The Bank still thinks that inflation will fall back to, and then below, its target without the need for a rise in interest rates.
But even if interest rates are kept at their record low, the economy may struggle to get through the fiscal squeeze. And if inflation proves more persistent than hoped and rates do rise, we could be in real trouble.
Vicky Redwood is a UK economist at Capital Economics
