Big stimulus programmes can produce big economic effects. That insight is hardly revelatory, but it was still striking to see the Organisation for Economic Co-operation and Development plug President Biden’s $1.9tn package of tax cuts and spending commitments into its models and produce wildly different growth forecasts – even from three months ago.
In the US, the OECD had been expecting growth of 3.2% this year, merely a solid rebound from 2020. Now, with a shove from the “American rescue plan”, it predicts 6.5%, which would be the strongest annual expansion in the US in decades.
The UK should enjoy spillover effects which, coupled with a speedy vaccine distribution programme, will mean growth of 5.1% this year, almost a full percentage point better than predicted in December. For 2022, 4.7% is pencilled in – again, a noteworthy increase from the previous forecast of 4.1%.
There are, of course, huge uncertainties around the predictions. The OECD’s economists have no greater insight than anybody else into how the virus will mutate. They have assumed vaccines will be effective. Nor can they know the degree to which locked-down consumers will let rip on spending when given the chance.
The other big uncertainty is inflation, which has been financial markets’ obsession since Biden’s election. Is a $1.9tn programme, or a colossal 8.5% of US GDP, too much for an economy entering recovery mode anyway? On that score, the OECD offered reassurance: there is plenty of slack in the US labour market, so any upwards pressures of prices should be temporary.
Strong growth with little risk of inflation sounds almost too good to true, which is why policymakers at the Bank of England should maintain their “all options open” stance for a while yet. But we can probably say this: the flirtation with the idea of negative interest rates can be put to bed. If, as the OECD thinks, it is credible that the UK economy can produce annual growth of 5.1% and then 4.7%, the next change in interest rates is most likely to be an increase.
Mike Ashley must explain zero-hours switch at Evans Cycles
Mike Ashley’s timing was superb when his Frasers Group bought Evans Cycles out of administration in 2018. The pandemic has created a cycling boom and Evans will have enjoyed the same bumper trading conditions reported by Halfords.
Ashley’s plan to cut 300 jobs at the 55-strong chain is therefore odd. Even stranger is the apparent demand that remaining store staff switch to zero-hours contracts. Didn’t Ashley, after his encounter with MPs over working practices at Sports Direct, promise to phase out such contracts? He did – but it never really happened.
This would be a good moment for MPs to revisit the problem, because the pandemic has provided perfect cover for employers to downgrade terms and conditions. And if Ashley thinks his approach at Evans is not an opportunistic try-on, he would surely be happy to explain.
Cairn Energy and India reach endgame
An end was supposed to be in sight a year ago for Cairn Energy’s tax dispute with the Indian government, which dates back to 2014. And resolution was definitely meant to have been achieved last December, when the Edinburgh-based oil and gas explorer was awarded $1.2bn, plus interest and costs, by an international arbitration tribunal. India was found to have breached its obligations under the UK-India bilateral investment treaty.
Yet it is only now that the quarrel, which relates to the retrospective application of tax changes on Cairn’s former assets in India, is approaching the endgame. With not a dollar received from Delhi so far, Cairn on Tuesday said it had identified Indian sovereign assets overseas that it could seize if necessary. Alternative tactics could include “monetisation”, meaning selling the debt, which has reached $1.7bn, to the corporate equivalent of a debt collector.
Either option would be a severe escalation, so Cairn emphasised it was also “engaging” directly with the Indian government. But, as $1.7bn is a hell of a sum for a company worth £1bn, Cairn can hardly let it go. In any case, it has won in court at every turn.
The dispute has been low profile, probably because the plot has developed so slowly. But the UK and India are supposed to be signing an expanded trade partnership next month. Cairn is perhaps too small to alter the grand politics, but surely its position is not irrelevant. This affair should not still be rumbling on.