May 05, 2008	Monday	Rabi-us-Sani 28, 1429

The 10p tax flap, the slow down of the economy in the first quarter of the current financial year, fears of inflation and oil refinery workers’ strike have all joined up to push Prime Minister Gordon Brown’s Labour government into what appears to be a tight economic corner.

The prime minister had to apologise to the affected people for the confusion caused by the 10 per cent tax. The abolition of the lowest rate of income tax came into effect this month, alongside a reduction in the basic rate of income tax from 22 to 20 per cent and increases in child benefit and tax credits.

Last week the government said it would outline a compensation package for pensioners aged 60 to 64 and low earners by this autumn’s pre-budget report - after concerns 5.3 million of the UK’s lowest earners would lose money because of the 10 per cent tax. It prompted Labour rebels to withdraw an amendment to the Finance Bill - which implements the Budget - calling for a compensation package.

Meanwhile, the slow down in the economy and fears of inflation, in a way have warned the government that stagflation could be just round the corner in the UK.

As the oil production went down and the credit crunch severely constrained business and other economic activities including construction, the economy slowed down to a rate which is said to be the weakest in the last three years.

The official data released on Friday last showed that gross domestic product slowed from 0.6 per cent in the last quarter of 2007 to 0.4 per cent in the first quarter of 2008. The annual growth rate, therefore, fell from 2.8 to 2.5 per cent.

The British economy had shown a relatively higher growth rate trend over the last ten quarters without any hiccups, but the last quarter has been highly disappointing. The Bank of England has promised to cut interest rates further if the trend in economic slow down continued. But analysts said that even a hefty cut in the coming weeks would not help improve the situation.

Analysts blame an unexpected fall in oil and gas extraction which happened mainly due to bad weather at one major oil field, as one of the two major causes for the slow down in the economic growth. Other sectors are said to have slowed down only modestly.

The other major factor impacting the growth rate adversely has been the sudden loss of the momentum in the service sector with growth in this sector slipping from 0.7 to 0.6 per cent and a sharper slowdown in some of the areas most exposed to the effects of the credit squeeze. As the business and financial sectors slowed down from 0.6 to 04 per cent which is regarded as the slowest since 2003, the activities of the accountants, lawyers and architects also took a battering affecting jobs and incomes.

Construction sector suffered significantly as its growth rate of 0.5 per cent was less than half the rate of the previous quarter. The ONS’ warning in its preliminary report that the estimates in the construction industry could be revised further lower when all the figures are compiled failed to hold any hope for the housing sector.

Analysts were, however, surprised by the strength of the retail spending in recent months which is said to have pushed output from distribution, hotels and restaurants up 0.9 per cent after a stagnating performance of 0.2 per cent in the last quarter of 2007. Manufacturing output also registered a surprisingly buoyant 0.5 per cent increase.

”Looking ahead, the recent downturn in forward-looking indicators and the major imbalances in the economy suggest that growth could slow considerably further in the coming quarters,” said Jonathan Loynes at Capital Economics, a London- based research firm.

Quarter1’s provisional GDP figures confirm that the economy started to slow in the early months of this year. Capital Economics expects growth of around 1.7 per cent this year to be followed by just one per cent or so in 2009, with a significant chance (perhaps 1 in 3) of a technical recession.

In a related development, the recent increases in oil and gas prices are said to have increased the chances of consumer price inflation breaching the three per cent ceiling. The latest surge in oil prices is likely to put further significant upward pressure on the energy components of the consumer price index over the coming months. It is estimated that, if oil prices remain close to $115 per barrel, petrol prices will rise from their current level of around £1.08 per litre to £1.15 per litre or above, an increase of some six to seven per cent.

Similar sorts of increases last Spring mean that petrol’s contribution to overall inflation is unlikely to rise significantly and may still ease a bit over the next few months – it is currently adding around 0.7 per cent to the headline rate.

Nonetheless, it is now unlikely to fall back as sharply as it was previously hoped, unless of course oil prices drop back very soon.

Meanwhile, the strength of oil prices is also expected to have knock-on effects on other energy prices. The increase in wholesale gas prices suggests that the contribution of gas to inflation is likely to rise significantly further over the coming months. This points to further increases in household bills on top of those in February. Electricity prices are likely to move in the same way.

The strike of oil workers at one of the North Sea’s largest oil outlet is also likely to add to the UK’s economic woes. The stoppage at the refinery has disrupted fuel supplies and brought almost half of the UK’s North Sea oil production to a halt. Some 1,200 Unite union members walked out of the central Scotland Ineos plant on Sunday in a dispute over pensions. The Forties oil pipeline, which delivers 30 per cent of the UK’s oil output from the North Sea, was closed as a direct result of the dispute.

The disruption has helped push oil prices to a fresh high of just below $120 a barrel. Fuel has begun arriving at ports across Scotland to ease pressure on the forecourts where increased buying has led to shortages for some retailers. About 65,000 tonnes of fuel is being shipped in to replace some of the lost production from the Ineos oil refinery, Scotland’s main fuel supplier. Analysts say that even if the strikers return to work by the end of the week, it would take some time for the oil to start flowing through the pipelines.

Even if the workers returned to work by the end of the week, it could take some time before normal operations are resumed.