The ONS yesterday released figures indicating that there was a 0.2% contraction in the economy in the first quarter of 2012. This news coupled with the -0.3% fall in GDP in the final quarter of 2011 mean that we now technically in recession for the first time since 2009. It is worth remembering that the ONS may well revise their figures upwards so we could soon find ourselves out of recession. That being said they could also downgrade their figures even further so the picture could be even bleaker than we first thought. No sooner than the figures were released a number of leading economists cast doubt on the validity of the ONS figures (see Stephanie Flanders’ excellent blog post for some analysis of the debate over the numbers). George Bernard Shaw’s famous line that ‘if all economists were laid end to end, they would not reach a conclusion’ seems especially apt today.
I must admit I was taken by surprise at the news as various business surveys such as the BCC’s latest Quarterly Economic Survey and the recent Markit/CIPS UK Services survey pointed towards modest, but positive growth. In addition, there was the recent fall in unemployment and signs of growing confidence amongst employers. The latest Recruitment and Employment Confederation JobsOutlook survey also released yesterday for example found that employer confidence was at a record high. Another survey from Nationwide released today found that UK consumer confidence was at a nine-month high in March. Nonetheless, it is not these surveys but the official statistics which determine whether or not we are in recession and which are of huge political significance.
As you would expect, the media has gone into overdrive with commentators from all sides heaping further pressure on the government. Will Hutton today in the Guardian for example labelled George Osborne the ‘Kamikaze Chancellor’ and argued that a ‘collective madness seems to have descended on our policymakers.’ Another leading pundit, Allister Heath, the editor of City A.M, argued in his editorial that whilst Gordon Brown is ‘still the main culprit’ for our economic woes, the recession was a result of a failure of the government’s supply side reform agenda and very much the fault of the current occupants of Downing Street.
This is undoubtedly the most difficult period the government has faced since coming into office and yesterday’s figures are arguably more of a political problem than an economic one. The fallout from the Leveson inquiry will no doubt rumble on, there were the rows over taxes on pasties and caravans following the budget and there have been growing tensions inside the coalition over the government’s plan for growth (see Vince Cable’s infamous leaked letter as an example of this). The challenge now for the government and what will ultimately determine whether they are re-elected in 2015 is whether they can wrest back the initiative on the economy. Central to this will be accelerating the various aspects of their growth agenda, putting more flesh on the bones of their industrial policy and above all communicating more effectively with voters why the decisions they have taken thus far are the right ones for the long term benefit of the economy.
For the opposition and the two Eds, yesterday’s figures were seen as vindication of their position and their central argument that the government have gone ‘too far, too fast’ with their deficit reduction strategy. Ed Milliband at Prime Minister’s Questions declared that it was the government’s “catastrophic economic policy that has landed us back in recession” and Ed Balls took on Danny Alexander, the Chief Secretary to the Treasury, on last night’s edition of Newsnight and re-iterated his own five point plan for jobs and growth. Whilst the government’s economic and political woes are clearly boosting Labour in the polls, they must avoid getting carried away as they have a long way to go to convince the electorate that they have the solution to the UK’s lack of growth. Moreover, in reality their spending plans (well at least those of Alistair Darling prior to the 2010 election) do not radically differ from the governments and they still have not set out what cuts they would make and why. In addition, those calling for an added stimulus to give the economy a boost seem to gloss over the fact that government’s total spending in 2010-2011 was still £691.67bn which was a 0.34% change after inflation on 2009/2010. The national debt now for the first time exceeds one trillion pounds. I am not therefore convinced that adding to this by unleashing a massive dose of additional government spending will lead to either an instantaneous return to growth or be in the best long term interests of the health of the economy.
Ultimately what these figures confirm is what we already knew. Growth will continue to be erratic and we are set for what the Governor of the Bank of England Mervyn King has referred to as a zig-zag recovery. It is evident also that whilst the Eurozone crisis is momentarily out of the headlines, it is far from over and will continue to have a negative impact on growth in the UK. Nonetheless, this cannot be used as an excuse or the sole explanation for our stuttering economy. There are other factors which are playing a significant role such as consistently low levels of business investment, businesses continuing to struggle to gain access to credit and worrying low productivity growth across the economy. Now these are problems which are not easy to solve and were with us before the 2008 crash so it would be wrong for commentators to argue that they have arisen in the past two years. In addition, whilst politicians are in the business of scoring points, it is clear that no-one has all the answers to the UK’s growth dilemma and should not pretend to.
In the UK we definitely have a propensity to think the worst and the observation from the economist Dr Gerard Lyons that the ‘UK’s greatest export is its pessimism’ is an accurate one. We have a number or world class sectors in the UK and a number of advantages over our competitors (the UK is still seen as an attractive place to invest, we have an incredibly strong scientific research base and a flexible labour market) which can act as the foundations of future prosperity. Just one example of an area where the UK has genuine potential to become a global leader is in the development of smart grid technologies and services and I would point you towards a new SmartGridGB report for more on this. The challenge for policy makers is to work out how best to take advantage of our comparative strengths in an increasingly competitive world economy. It is rising to this challenge which will define whether or not the UK thrives in the years and decades ahead.