The challenge of good economic news

George Osborne

Inflation falling, employment rising and the economy forecast to grow faster than previously expected. In the words of the Governor of the Bank of England, Mark Carney, the recovery "has finally taken hold".

If you are George Osborne, you could be forgiven for dancing a small jig at all this positive news. Yet there will be little overt merriment in the Treasury. One source there told me: "We are still cautious. There are quite a few risks out there." So why the worry?

1) The impact of the growing economy has still be felt by the public. Wages are rising more slowly than inflation. Many part-time workers want to work full-time. Voters are rarely convinced by politicians waving positive statistics. People will need to feel the recovery in their pay packet and on the shop floor before they are persuaded that the tough times are ending. Smug complacency now would be silly political strategy.

2) The economy is not growing in the way that many believe will permanently sustain recovery. Again, to quote Mr Carney, the recovery is being driven by "a modest recovery in consumer spending and a revival in housing investment", not by a growth in business investment and export demand. The last thing the Treasury wants is for growth to ease off in the run-up the election. Even now, Mr Carney says that quarterly growth rates "are likely to ease back a little next year". It would only take another crisis in the eurozone for the recovery to be knocked off course.

3) Mr Carney says he now expects the Bank of England to consider raising interest rates sooner than expected. This is triggered by its new rule which says that the Monetary Policy Committee will look at changing rates only once unemployment falls to 7%. So the faster-than-expected recovery could mean that interest rates rise before the general election in May 2015. If much of the political debate at the election is about the cost of living, the last thing the Conservatives and Liberal Democrats would want is a rate rise that would hit families directly.

4) Counter-intuitively, if the economy grows too quickly, this could threaten the government's electoral strategy. Both the Conservatives and the Lib Dems want to go into the election telling voters to stick to what they know, to trust the coalition to finish the job. But if voters feel that the recovery is secure, they may feel more relaxed about voting for change, namely Labour. The last thing the coalition wants is for voters to feel it is safe enough to give the other side a go.

So essentially the political challenge for George Osborne is get the balance right between optimism and pessimism. And as the economy recovers, that is a balance that is going to keep on changing. The challenge for Labour is to keep the political debate off the recovering economy and back onto the cost of living.

James Landale Article written by James Landale James Landale Deputy political editor

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