Thread by @KellerZoe

The UK economy is doing a lot better than its implacable critics will admit. With the right policy mix, the UK may even be the G7’s fastest-growing economy again in 2022
✍️🏼 AEP
telegraph.co.uk/business/2022/…

The purist methodology of the ONS overstated the 2020 collapse in GDP and it has overstated the mechanical rebound in 2021 (an explosive growth of 7.5%). France has seen the same distortion. UK is in the middle of the G7 and OECD pack, just shy of its pre-pandemic level of GDP.

Even so, the UK has recovered well ahead of Japan, Germany and Spain, and slightly ahead of Italy. France has done better but discretionary fiscal stimulus is enormous — Macron’s critics allege pre-electoral pump-priming (il crame la caisse) — so the comparison lacks relevance.

Canada has again pulled ahead, but so it should as a major commodity exporter in the middle of a global commodity boom. The US has achieved energy independence and is therefore recycling the soaring cost of fossil fuels within its own economy.

UK inflation is reaching nosebleed levels — a 7.25% peak pencilled in for April — partly because it's overly reliant on natural gas for heating and power plants. Holland and Belgium are in the same boat, and their inflation reached 7.5% and 8.5% in Jan respectively.

We should accelerate the switch to cheaper home-grown energy under our own strategic control as fast as possible. Macron has unveiled a massive double-barreled push for nuclear power and renewables (offshore wind and solar). This energy mix is what the UK too should be doing.

For the immediate future, the global surge in fossil fuel prices might abate over the coming months. The market intelligence firm Lium LCC says America’s shale frackers are likely to boost output by 1 million barrels a day this year.

Washington has given ground in nuclear talks with Iran, raising the likelihood of a deal entailing the partial waiver of sanctions and a return of some Iranian barrels to the market.

But we are undoubtedly moving into an era of higher structural prices for natural gas. The futures market is pricing in continued high prices through the summer against the normal seasonal pattern.

Even if that proves correct, the inflationary impulse will fade. The headwind for the British economy will weaken because we use far less gas in the summer, and solar kicks in to complement wind.

It is almost orthodoxy that the UK is becoming the world’s basket case of stagflation and declining living standards. Once again I suspect that the analysis of global institutions and much of the economic commentariat is coloured by a struggle to come to terms with Brexit.

That orthodoxy was badly wrong a year ago when the OECD forecast that Britain would be at the bottom of the growth league, limping into 2022 with output still 6.4% below its pre-Covid peak.

The growth of the UK’s broad money supply has slowed sharply and is starting to contract in real terms. It would be an error for the Bank of England to heed the chorus of rear-view inflationistas and slam on the brakes just as liquidity is evaporating anyway.

Comments by chief economist Huw Pill this week suggest that the Bank of England is fully alert to the dangers. I am slightly less worried that it will make such a mistake.

What does worry me is that business investment is still running at 10.4% below its pre-pandemic level, despite Sunak’s 130% "super deduction", a cut in the effective marginal rate of corporation tax to zero. Companies have not yet unleashed their £100bn stashes of savings.

“There is a lot of firepowers and I am optimistic that they will start investing this year,” said David Owen from Saltmarsh Economics. “The big picture is that the economy is opening up and growth could surprise in the upside again. It could be close to 5%”.

In my view, it would be ill-advised to go ahead with the rise in national insurance. It is a tax on work and production while shielding rentiers and the retired, the two wealthiest cohorts of society – a de facto transfer from the creators of GDP to the consumers of GDP.

If Sunak drops the NI foolish plan and the Bank of England does not overreact to a one-off energy spike, there is good chance that Britain will go through 2022 without the disaster so many predict and some seem to want to punish the Tories, or the Brexiteers, or us for apostasy.