April 11, 2014 6:47 pm

George Osborne warns of risks ahead for economy

Chancellor George Osborne©Reuters

George Osborne says increased geopolitical risks, particularly in Ukraine, and the likelihood that the US Federal Reserve will soon think seriously about raising rates is likely to lead to market volatility.

Striking a note of caution about near-term economic prospects on Friday in Washington, the UK chancellor tempered an upbeat message on the British economy’s ability to expand strongly amid continued deficit reduction.

“A large financial centre like the UK needs to be particularly alert to emerging market volatility,” he said.

Speaking to journalists on the fringes of the International Monetary Fund spring meetings, Mr Osborne warned that the UK economy might be buffeted by volatility in financial and housing markets over the coming year.

“We need to build a resilient economy in the UK so that we are prepared for the return of more normal levels of market volatility and the emerging geopolitical risks.”

Mr Osborne’s caution reflected a concern in the Treasury that an optimistic speech he made in Washington on the UK’s prospects might tempt fate and appear hubristic.

The chancellor said even after the squalls in markets over the Fed scaling back its asset purchases last year had subsided and financial market volatility had returned to unusually low levels, it was likely to be only temporary. Rising volatility, he added was a normal process in recoveries but something that required vigilance.

The chancellor added that if new sanctions on Russia were required, they would hit the UK economy but governments needed to weigh up that damage against the greater threats from countries flouting international law if Russia’s actions went unpunished.

Mr Osborne acknowledged potential dangers from rising UK house prices, saying: “We have constructed a new system for spotting risks in the housing market as they emerge and having the tools to deal with it”.

He said the Financial Policy Committee needed to be vigilant on the housing market and supported measures that the Bank of England’s committee had taken to improve underwriting standards on mortgages.

“[The FPC has] already taken some steps. If it takes further steps this year or next year, we will be supportive of that . . . it is all about building a more resilient economy,” Mr Osborne said.

The chancellor’s warnings over potential risks to economic prospects contrasted with his upbeat speech, where he took on critics of his austerity drive, saying UK growth “proved comprehensively” that deficit reduction was compatible with recovery.

The speech also sought to expand on the Treasury’s view that there has not been a breach in the normal relationship between economic growth and rising living standards. The chancellor noted that the share of national income going to labour in the economy had risen since the recession, suggesting there was little evidence that companies were making profits and not passing them on to employees.

“When the economy shrinks, people get poorer, and the only way to ensure people are better off is for the economy to grow,” Mr Osborne said, adding that government’s should seek to “build a ladder of opportunity for people to climb”.

The chancellor contrasted what he called his “optimistic” approach with his “pessimistic” political opponents, who he said were intent on increasing government spending and restricting free markets as the route to a more equal society.

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