Economics Weekly

As can be seen from our Economic Scoreboard, the balance of data is still negative which has been reinforced this week by falls in US retail sales and industrial production in April. The second quarter has got off to a weak start. News on the pricing front has also been soft with core producer and consumer prices both coming in on the soft side. On the positive side, little has changed although the easing of financial market conditions (lower corporate spreads, higher equity markets) appears to be flowing through to the real economy as bank lending standards are reported to be less tight in the latest Senior Loan Officer survey from the Federal Reserve. In Europe, attention has focussed on the weakness of first quarter GDP in Germany and Italy. This does not feature in our Scoreboard (as it was pre the fall of Baghdad), but will put added pressure on the ECB to ease policy. On the domestic front, there has been a modest bounce in consumer confidence and the PMI surveys but they remain well below the levels recorded at the end of last year.

Viewpoint - EMU entry: No ... not yet? Earlier this week, Gordon Brown revealed that he will be officially announcing the results of his “Five Economic Tests” on June 9th, after consultation with the rest of the Cabinet. With opinion polls still firmly against (see Table 1. below) and economic arguments ambiguous at best, there is little doubt that the conclusion will be “no, not yet”. The more pertinent issue is whether he rules it out for this Parliament or leaves it open-ended. It is here where the rift between Brown and Blair is most visible. Brown wants to rule it out for the rest of the current term to minimise economic uncertainty while Blair is keen to leave the door ajar.

In this respect, the timing of the next election (at the latest by June 2006) may be relevant. If Euro-entry is to be ruled out in this Parliament (Mr Brown ‘winning’ the present debate), a case could be made for an early election, maybe even next year. This would keep the PM happy, enabling a case to be made for entry early in the third term. The deteriorating state of public finances could also lend to this strategy, ruling out any need for the Chancellor to raise taxes or rein in public spending in this Parliament.

Alternatively, leaving the decision open (Mr. Blair ‘winning’ the present debate) could mean a much later election, in 2006. This would give the PM more time to persuade a sceptical public of the merits of entry. Meanwhile, the Chancellor would just have to hope that an economic recovery is by then fully entrenched and the massive investment in public services is finally paying its dividend. After all, the health service (and now defence) are much higher on the list of public concerns than Euro-entry (see chart 1. below).

Both of these hypotheses, however, have their shortcomings. There is no recent precedent for an election 3 years into a parliament and the media would probably interpret it as an admission that something is going wrong. On the other hand, leaving an election to the last minute would reduce the government’s flexibility on timing. Our view is that the decision will be ruled out in this Parliament as Brown seeks to maintain an economic basis (and credibility) to the decision whilst bringing some, albeit short-term, certainty to the debate. This supports the case for an early election, but this is unlikely to come before 2005.