Economy
RBS: VAT cut will flop |
|
|
| Written by Gary Howes | |
| Monday, 01 December 2008 | |
|
Weekly Chief Economist report at bank hints that the MPC will go further on rates and VAT reductions will be a flop.
RBS (LON:RBS) has this morning said they expect the Monetary Policy Committee (MPC) at the Bank of England to cut rates further this week. In his weekly brief RBS Group Chief Economist, Andrew McLaughlin, says that Further action is likely this week with rate cuts expected in the UK and Eurozone.Despite what should be a positive move in economic stimulus RBS warns that it may not prevent the destructive de-leveraging that would lead to a protracted downturn. VAT will not deliver In his brief McLaughlin also said that he does not expect the VAT cut to have much influence on the fortunes of the high street. Last week’s Pre-Budget Report detailed the fiscal response to the UK’s economic woes. The biggest change takes effect today, with VAT dropping from 17.5% to 15%. Two reasons are cited for the VAT plan not working: First, retailers could use the change to support margins. Second, the absolute amount of savings is modest for most purchases, which could limit the incentive to buy now rather than later. Adding up the boost from all the measures means that the government will inject c£20bn into the economy over the next year (around 1% of GDP). RBS however says that the stimulus will push the public finances further into the red. The public deficit is likely to exceed 5% of GDP in the next two years and fall gradually thereafter. This is likely to take the UK’s debt/GDP ratio to 57% by 2013 - still modest by international standards but 17 percentage points above its current level. US data US data shows that capital spending had already slowed abruptly due to financial turmoil and economic uncertainty, but lurched even lower in October. A key indicator of investment (durable goods orders excluding defence and aircraft) fell 4.6% m/m in October. This left orders 9% below their July peak - the largest three-month fall in the series history. But firms aren’t the only ones not spending. Personal consumption plunged by 1% m/m in October, the largest drop since 2001. Much of the fall reflects cheaper gasoline, but the fifth successive fall in spending is already a month longer than during the 1990s recession. Households are clearly saving much of the windfall from lower oil prices - the savings rate jumped to 2.4% from 1.0% in September. China McLaughlin had the following to say on the prospects of the Chinese economy: "In China it seems they are of the same mindset that fiscal policy alone will not be enough to see them through the downturn. "Less than three weeks after unveiling a 4 trillion yuan ($586bn) stimulus plan, the People's Bank of China cut its lending rate by a whopping 108bps, the biggest cut since the 1997 Asian financial crisis. Other measures to ensure sufficient liquidity and promote steady loan growth were enacted after growing concern over unemployment, civil unrest and falling house prices. The OECD forecasts expansion in 2009 of just 7.5%, tantamount to a recession in a country used to 12% growth." T
|
Digg it! 
del.icio.us 
Newsvine 
Reddit 
Stumble It! 
