The growth figures are disastrous – but so bad there’s no chance of an interest rate rise this year.
In his budget speech last month, Chancellor George Osborne suggested that he was hoping for “an economy where the growth happens across the country and across all sectors. That is our ambition”. Sadly, to judge by Wednesday’s GDP figures, growth under this coalition remains just an ambition, a mere illusion. The British economy has not grown at all over the last six months, it has flatlined and is stagnant, simple as that. In contrast the economy grew by 1.8% over the previous two quarters of 2010, when the previous Labour government’s policies still had a strong influence.
This is not “good news”, as David Cameron astonishingly claimed at prime minister’s questions – where he was accused by the Labour leader, Ed Miliband, of “extraordinary complacency”. In fact it is disastrous. It is time the prime minister stopped the spin and recognised that the government’s economic policies are not working. The sad truth is that the data is going to worsen a lot in the second and third quarters of this year and into next as the austerity measures hit. Over the last six months employment has grown by only 65,000 – far below the numbers needed to compensate for the cull of jobs the coalition has planned. Unemployment is set to rise.
The excuse that the poor performance of the economy was due to the snow has also been put to rest: it is entirely attributable to the coalition’s reckless economic policies. Some coalition supporters in the City have even claimed the numbers just can’t be true and will be revised upwards; but there is still a chance that these numbers will move down if the most recent revisions to GDP data are anything to go by. Since the start of 2007 the average revision has been to reduce growth by 0.1% a month. And if the next quarter’s data is bad, coalition ministers will probably try to blame it on Easter being late, or the royal wedding.
The driving force pulling growth downwards was the construction sector, which decreased by 4.7% – a larger drop than the market expected. Services and manufacturing grew by 0.9% and 1.1% respectively. And government spending increased by 0.7% compared with a decrease of 0.1% in the previous quarter. But this week’s CBI industrial trends survey suggested that growth in manufacturing has reached its high-water mark. The collapse in consumer confidence indicates that the retail sector will not support further growth. And given that the government sector will be a big negative, the future for the economy looks pretty bleak.
The claim that the increasingly awful economic news is all down to Gordon Brown and Alistair Darling, and is not the coalition’s fault, doesn’t seem to be convincing the British public. According to the latest YouGov poll this month, 52% of respondents thought the coalition government is handling the economy badly, compared with 15% in May 2010 and 38% last October.
Even though Wednesday’s data is consistent with many predictions, it is well below the Office for Budget Responsibility’s forecast of 0.8%. The coalition has been in office for nearly a year and they now need to own these GDP numbers. They are Osborne’s fault; the economy slowed sharply because of his incompetence. The whole idea of an “expansionary fiscal contraction” was always “oxymoronic”, as Larry Summers, President Obama’s former adviser, noted at Bretton Woods recently. There is no convincing evidence that such policies have ever succeeded in pulling an economy out of a deep recession.
The only bit of good news is that the job of the Bank of England’s monetary policy committee should now be a lot easier: the poor growth data should take away any possibility of an interest rate rise this year.
In the immediate term, the MPC’s next announcement comes at noon on 5 May, the day of the local elections. My experience of being on the committee suggests that members would be extremely wary of changing rates on such a politically charged day.
At the last meeting, members Martin Weale and Spencer Dale both voted for an increase of 25 basis points, but notably changed their reasoning from “compelling” in March to “finely balanced” in April. The new data release suggests to me that both will now vote for “no change” next month: indeed, it is inevitable that the MPC will downgrade its growth forecast in the May inflation report, which raises the prospect of further quantitative easing this year.
The times they are a changing, but not for the better. It’s time for a rethink, George, if you want to keep your job.