Imagine my absence of shock.
– UK GDP slump: Osborne’s blundering incompetence made the economy sicker (Guardian, July 25, 2012):
Yes, it was raining. Yes, we had an extra day off to celebrate the Queen’s 60 years on the throne. Even so, news that the economy contracted by 0.7% in the second quarter of 2012 came as a real shock.
The City had been braced for bad news, but not this bad. Analysts had expected a 0.2% drop in output, and were taken aback by evidence that Britain’s double-dip recession has not only extended into a third quarter but is deepening as well. Bad was not really the right word to describe the figures. Catastrophic was better.
George Osborne will no doubt take comfort from the fact that growth is expected to bounce back in the third quarter as the lost production from the jubilee bank holiday is made up, and tourists flock to London from the Olympics. This, though, is clutching at straws.
Figures from the Office for National Statistics show that all three sectors of the economy are showing signs of weakness. Construction, where government cutbacks in infrastructure spending are really starting to bite, showed the biggest fall, but manufacturing also registered a hefty decline and there was a small drop in the service sector, which makes up 75% of the economy.
As a result, the economy is now 0.8% smaller than it was in the second quarter of 2011 and the double-dip recession is now longer than that which followed the oil shock of the 1970s, when UK inflation hit a peacetime record of 26%. Output has declined in five of the past seven quarters and has been going backwards since the autumn of 2010.
For the chancellor, these figures are calamitous. The government’s deficit reduction strategy, which relies on the economy growing at 2 to 3% a year, lies in tatters. The credit rating agencies were already raising an eyebrow at Britain’s poor growth performance, and the risk of a downgrade now looms large. Britain’s status as a safe haven as the euro self-destructs is a bit of a joke when the economy is going backwards at its current rate.
The one glimmer of hope for the government is that inflation is now coming down at a fair lick, which means that consumer incomes will stretch a bit further in the months ahead. That should provide a modest boost to spending. This, though, could easily be cancelled out by the impact of Europe’s sovereign debt crisis on exporters and on UK banks.
Brendan Barber, the general secretary of the TUC, made the telling point that the economy is now smaller than it was when the coalition came to power in 2010. That is a quite appalling performance, especially in the context of 0.5% bank rate, £375bn of electronic money creation and £500bn-plus of public borrowing since the recession began.
The bottom line is that the government failed to recognise just how sick the economy was when it took office in 2010. Its blundering incompetence has made it sicker.