Darling lays on the pessimism extra thick!

It is manna from heaven for the Chancellor to give Economics teachers such a juicy headline to work with right at the start of teaching a macroeconomics course because it allows us to ask students just how we measure the performance of an economy and test the extent to which this is perhaps the most profound downturn in the post-war period?

GDP growth is stagnant, inflation is more than double the government’s own target of 2% 9with inflationary expectations also heading north) and unemployment as measured by the claimant count and the labour force survey is starting to pick up fast amid a wave of redundancies.

But even a cursory glance at macroeconomic data stretching back to the 1950s and 1960s tells us straight away that the economy is not in the same perilous position than it was in the stagflationary days of the 1970s and early 1980s.

So why is Darling making such a claim? As the Treasury Insider, does he have background information on where the economy is heading? Are the ‘leading indicators’ such as consumer confidence and the purchasing managers index really that dire that a deep and full-blown recession is inevitable? Or is his game one of downgrading expectations so much that a modestly poor outcome in 2009 can be trumpeted as a major triumph of macroeconomic policy-making?

The bursting of the financial bubbles will indeed bring about powerful deflationary forces as we head through 2009 - although lower oil, energy and food prices ought to provide some relief. One of the dangers of the Chancellor’s words is that he risks accentuating the steep decline in consumer sentiment and making the downturn in the cycle even worse in the short run. Dan Ariely wrote about the psychological impact of people repeatedly hearing bad economic news in a recent post on his blog.

PowerPoint Charts
Darling_Low.ppt