The danger of a no growth plan
The UK economy goes backwards
If the chancellor George Osborne is not having a secret moment of doubt about his economic policy, he ought to be. The UK economy went backwards at the end of last year, according to figures released yesterday.
Most forecasters were surprised that GDP fell 0.5 per cent in the fourth quarter, according to the preliminary estimate from the Office for National Statistics. The consensus forecast was that GDP would rise by 0.5 per cent, in itself a slowing in the rate of growth. Yet we had the first fall in national income since the third quarter of 2009.
Osborne blamed the bad weather in December for the figures. This excuse only goes so far. The ONS estimate is less certain than usual because the weather was so disruptive. With relatively little data to go on, the statisticians had to make assumptions and use statistical techniques to estimate the impact of the heavy snowfall. Their best guess is that it knocked 0.5 per cent off GDP, mainly in service sectors such as hotels, restaurants, transport, and leisure. That means without the snow, there would probably not have been any growth, not the 0.5 per cent rise predicted.
The story of 2010 does seem clear. The economic framework Labour put in place in 2009, which continued into 2010, provided the conditions for the economy to recover. Strong growth in Q2 and Q3 last year was driven in large part by government spending (based on Labour's budget) and the construction industry. Our manufacturing sector continued to do well, growing 1.4 per cent last quarter. Yet the economy remained fragile and economic confidence was probably subdued by concerns about the Tory-Liberal Democrat ‘austerity' measures. The cold snap in December exposed this vulnerability, though we have yet to find out to what extent. Over the next few months, the economy will face higher prices but sharp cuts in government spending.
Before we get carried away by one data point we need to remember that these GDP figures are likely to be revised as more information comes in. We should also remember that economies do not usually recover in a straight line; just look at the 1990s recovery for example. It is too soon to say that this recovery is not following the pattern of the past.
The problem is that Tory-Liberal Democrat economic policy leaves little room for manoeuvre. The sharp measures to cut the deficit have dented confidence and will hit demand. With prices rising, the Bank of England might be reluctant to pump more money into the system if growth remains low or negative. No wonder the governor felt compelled to say yesterday that ‘the right course has been set and it is important to maintain it.' He could not say anything other.
This bad news on growth does highlight the need for an alternative strategy. The government is still flailing around looking for a growth policy, causing some exasperation in business circles. In part this must be because it is not sure how a growth strategy fits in with an ideology committed to less government action. Labour can develop a narrative about growth and investment but we need to develop our thinking further. A commitment to growth means little unless it is connected to our vision of the society we want to see in the future. It has to be part of a credible plan to reduce the deficit over time that markets believe we will deliver on. Get these two elements in place and we will have a powerful economic message.
This article was first published on the Progress website on 26 January 2011.