In what was arguably most unwelcome surprise of 2011, it was revealed today that the UK economy contracted by 0.5% in the final quarter of 2010. This was unexpected, and in sharp contrast to the 0.5% increase predicted by economists prior to the announcement.
As Q4 2010 was, reasonably, the first GDP reporting period that can be attributed to (among other things) the actions of the Tory-led government, George Osborne was quick to blame the snowfall. This was based on the ONS’ assertion that “the change in GDP in the fourth quarter was clearly affected by the extremely bad weather in December last year”. And it is notable that, for example, manufacturing performed much better than construction.
We will be able to judge the truth of this retrospectively – if construction and services show strong growth in Q1-2 2011, it is reasonable to assume that the weather was a major factor in their decline. And the figure for Q4 2010 could yet be revised upwards. Norma Cohen of the Financial Times points out that this “preliminary” estimate of GDP is based on less than half of the information available to the ONS by the second revision.
However, the ONS adds that even without the snow, the UK would still be looking at no growth – a worrying contrast to the 0.7% growth in Q3 2010; and the 1.1% growth in Q2 2010. No growth is not a recovery, any more than negative growth is. As Ed Balls said earlier today:
“the Conservative-led government’s claims to have saved the economy and secured the recovery will ring very hollow indeed”.
They certainly feel hollow. Let’s take the best case scenario: the figures are revised spectacularly upwards, revealing (very) modest growth. Then what? We have rising unemployment, rising inflation and plummeting confidence. We are yet to feel the effects of the rise in VAT, the massive public sector cuts, and the wider implications of those cuts. Is this a recipe for reducing a deficit, to nurturing innovation, to creating wealth? It doesn’t look that way.
I could be wrong – but at the very least, this calls George Osborne’s course of fiscal consolidation into question. “It is going to re-open up the debate about fiscal consolidation and what it means to the economy and the growth rate outlook for 2011,” admitted HSBC economist Stuart Green, speaking to This Is Money earlier today. But given that the Chancellor feels that “there is no question of changing a fiscal plan that has established international credibility on the back of one very cold month,” how meaningful that debate will be is in itself questionable.
Nonetheless, a meaningful debate and a change in course is what Labour must push for, more strongly now than ever. Hopi Sen said in his blog earlier today that this is “about people’s jobs, livelihoods and families.” There’s no joy in being right about what is ahead, the joy comes in making it right. Some of this can be directly implemented by government – taxing bankers’ bonuses and financial transactions, working more effectively with the private sector to build more quality homes, giving local government more control over business rates. The other side is about nurturing – encouraging banks and venture capitalists to lend to new businesses, developing innovation clusters, making cleantech a priority. We can all think of good ideas, the challenge comes in turning those into a plan for the time when they can be implemented – and implementing it.
Labour will need to make this right. Because there isn’t a plan for growth. The plan for cutting the deficit is looking decidedly shaky. The only plan that seems to be going well is the plan for cuts – and it is becoming clear that that is the only plan that the Tories have.