The latest figures show that Britain’s economy has barely grown in the past nine months. The official statistics may underestimate the true growth rate – and there may be supply side factors that fiscal and monetary policy cannot address. But assuming the economy stays subdued, there will be a strong case for a boost to demand through macroeconomic policy.
There is no doubt that George Osborne’s policy of fiscal tightening has slowed the economy. But the intention was that its effects be cushioned by expansionary monetary policy and a lower exchange rate, and that still remains the best route to easier demand policy.
Inflation is still too high for the Bank of England to ease policy immediately, but underlying inflation rates are now falling sharply. We now know that it would have been a serious mistake for the Bank’s monetary policy committee to increase interest rates earlier in the year. The case for another round of quantitative easing is growing.