Government aim of rebalancing economy away from financial services towards manufacturing appears to have foundered
Britain is now halfway to an unprecedented triple-dip recession due to a stalled recovery in a manufacturing sector that was supposed to kickstart sustained growth in the aftermath of the credit crunch.
Industrial production was growing strongly in 2011 but the government’s aim of rebalancing the economy away from financial services and towards the manufacturing belt of the Midlands and north England appears to have foundered.
A fall in manufacturing output in the last three months of 2012 countered a small rise in construction between October and December to leave a 0.3% contraction in GDP, according to the Office for National Statistics (ONS).
The economy achieved zero growth for the year as a whole as the services sector, which accounts for three-quarters of national output compared with manufacturing’s 10%, also struggled to grow.
The decline was blamed on the recession in the eurozone, which has hit exports; bad weather, which hit shops and farmers; and a temporary drop in oil and gas output in the North Sea.
However, Chris Williamson, chief economist at the financial data provider Markit, said the figures revealed a “broad-based weakness throughout the economy” and threatened Britain’s AAA credit rating, viewed by George Osborne as an emblem of Britain’s economic credibility.
“Today’s numbers have greatly increased the risk of a new recession and a downgrading of the UK’s AAA credit rating. As such, the data pile ever more pressure on the chancellor to seek ways to revive the economy in the March budget,” Williamson said.
The chancellor, who faces accusations across the political spectrum of sitting on his hands as growth founders, said he would not run away from the problems facing the UK economy. “We have a reminder today that Britain faces a very difficult economic situation. A reminder that last year was particularly difficult, that we face problems at home because of the debts built up over many years and problems abroad with the eurozone, where we export most of our products, in recession,” he said.
The shadow chancellor, Ed Balls, called on Osborne to introduce policies that would “kickstart our flatlining economy”. He said: “A plan B now should include a compulsory jobs guarantee for the long-term unemployed and a temporary VAT cut to boost family incomes and our struggling high streets.”
The general secretary of the Trades Union Congress (TUC), Frances O’Grady, said the chancellor’s austerity plan had “pushed the UK economy to the brink of an unprecedented triple-dip recession”.
A triple-dip recession, or the third prolonged downturn since the credit crunch began, will occur if the economy contracts again in the first quarter of 2013. The economy remains 3.5% below its peak in 2007 and is not expected to return to its previous high for at least another two years, making it the longest recovery in 100 years.
“We are now midway through the coalition’s term of office and its economic strategy has been a complete disaster. We remain as dependent on the City as we did before the financial crash,” O’Grady said.
In the 10 quarters since the election, manufacturing has contracted by 0.4% and the construction sector by 9%, the TUC said. Wages have also declined over the past five years in real terms – taking inflation into account – and are expected to fall again in 2013. Recent figures showed pay packets edging up 1.4% at the end of last year, lagging an inflation rate of 2.7%.
Economists have warned that without higher wages or lower inflation, living standards will continue to be eroded and consumer demand will remain muted. With the consumer under pressure, almost a quarter of high street shops have signalled they are near to bankruptcy, according to retail sector surveys.
Several respected international bodies, including the Organisation for Economic Co-operation and Development and the International Monetary Fund, have downgraded the prospects of the UK economy this year and next, cementing the view that the economy will struggle to recover in time for the next general election in 2015.
The contraction in GDP in the fourth quarter followed a near 1% rise from July to September when the economy was boosted by the Olympics. A survey of economists had predicted a 0.1% drop in GDP between September and December, though several prominent analysts had forecast a bigger contraction in the wake of poor manufacturing data.
In the services sector, Britain’s economic powerhouse, activity ground to a halt in the fourth quarter owing to a loss of momentum after the London Games. A post-Olympic cut in spending on sport and recreational facilities also pushed down the result for government and other services by nearly one percentage point, after an increase of 1.6% in the previous quarter. All Olympic ticket sales were counted in the previous quarter, giving the ailing economy a one-off boost.
Few analysts doubt that the economy is failing to grow, but some questioned the methods behind the GDP data.
Jamie Dannhauser, an economist at Lombard Street Research, said the ONS’s prediction of a collapse in construction output in December – a key factor in the overall decline – was “completely inexplicable”. He said: “There are good reasons to fear a persistently weak UK recovery, but these data convey little information about the actual state of the economy.”
North Sea experts challenged evidence of a downturn in oil and gas production in the figures, saying industry records showed production rose in the runup to Christmas. The ONS suggested that two-thirds of the downturn in the fourth quarter was caused by a shortfall in oil and gas output due to rig maintenance.
A spokeswoman for Oil & Gas UK, the North Sea industry lobby group, challenged the ONS comments, citing government figures that showed a 26% increase in North Sea oil output between October and November.
Most economists said later revisions may narrow the decline in GDP, but were unlikely to push economic growth into positive territory.
Lee Hopley, chief economist at EEF, the manufacturers’ lobby group, said there was little positive news from the figures. “Even assuming some unwinding of activity from the Olympics boost in the previous quarter, this still leaves no real signs of underlying growth in the economy.”