These GDP figures are a disaster for the coalition government – politically as well as economically
The strategy has failed. The public knows it. The International Monetary Fund knows it. The credit rating agencies know it. Nick Clegg knows it. Even George Osborne knows it, although he can’t bring himself to admit as much.
Here is a brief resumé of how things stand for the economy after two-and-a-half years of the coalition government. National output has just contracted for the fourth quarter in the last five. The only quarter of 2012 in which the economy expanded contained the London Olympics, and unfortunately for the chancellor these sort of jamborees happen once every half century, not every three months.
During 2012 as a whole the economy registered no growth at all. Nothing. Zilch. A big fat zero. The only thing that has grown has been the list of ministerial excuses for the economy’s stubborn failure to live up to their rosy expectations. We have had snow, floods, the Queen’s diamond jubilee, the nuptials of her grandson, maintenance work on North Sea oil and gas platforms, Europe’s debt crisis and the US fiscal cliff. If the economy slides again in the first quarter of 2013, doubtless it will time for snow to be trotted out once again.
Yet this is not the first time it has snowed or rained. There have been other Jubilees, other occasions – such as the early 1980s and the 1930s – when the rest of the world was having its problems. Germany’s national output is above where it was when the recession started. The same is true of America, where policy makers believe that growth leads to deficit reduction rather than the other way round.
In Britain, GDP is more than 3% below its peak in early 2008, a weaker performance than the 1930s. RBS says the four-year performance of the economy between 2008 and 2012 is the weakest since the 1830s apart from postwar mobilisations.
Industrial production was the main factor behind the drop in output in the final quarter of 2012, with factory output back to levels last seen in the early 1990s. Rebalancing is a pipedream. Unsurprisingly, the Treasury’s deficit-reduction programme is well off track. This is an abysmal record.
Osborne is quite right when he says the economy was in bad shape when he became chancellor. The life or death struggle of the eurozone has not helped growth prospects and rising commodity prices have acted as a brake on consumer spending. But the government also sucked demand out of the economy by raising taxes, cutting welfare and, as Clegg has admitted, by taking the axe to capital spending programmes. The blood-curdling rhetoric from Osborne in 2010 about Britain being a Greece in waiting shredded consumer and business confidence.
Clearly, there is a risk the first quarter of 2013 will also be negative. The economy is fundamentally weak and the weather this past week will not have helped. Against this backdrop, there is mounting pressure for action. Boris Johnson’s call for spending on homes and infrastructure was meant to demonstrate there are alternatives to the government’s bankrupt approach. Osborne could use the budget to cut taxes and sanction spending on small-scale infrastructure projects that could be started immediately.
In reality, changes to fiscal policy are likely to be small and cosmetic. Osborne will rely on the Bank of England to do the heavy lifting. Further monetary easing looks inevitable, even though a combination of 0.5% bank rate and £375bn of quantitative easing has proved ineffective. The chancellor will cross his fingers and hope that the UK benefits from the slightly better news coming out of the US and China.
Yet politically as well as economically, the figures are a disaster for the government. With the clock ticking towards a 2015 election, it ensures the next few months will be spent debating a possible triple-dip recession and how soon the credit rating agencies will strip Britain of its AAA credit rating. This looks inevitable and when it happens, Osborne’s strategy will be in complete tatters.