Bad news and more bad news for the chancellor

The Duncan Weldon Economics Matters column

We now know that the economy grew by just 0.2% in the second quarter of 2011, following stagnation in the prior six months this means that the UK economy has grown by only 0.2% in the past nine months.

Whilst ‘special events’ – notably the Royal Wedding and the after-effects Japanese tsunami on global supply chains – almost certainly did impact upon the number, their exact effect is uncertain. As the ONS says:

“There can be no certainty as to the impact of the special events and there may be other factors at play.”

The underlying trend is one of weakness – in Q2 2010 the economy grew by 1.1%, more than four times as much.

There are two major stories in this number.

First – the OBR’s forecast of 1.7% for 2011 now looks very unlikely to be correct. The consensus forecast of independent economists now stands at 1.3%, although even this may be a stretch and further downgrades are not unlikely.

In autumn the OBR will almost certainly revise down its 2011 forecast – and as a result its borrowing forecasts will be revised upwards. In March it forecast Q1 growth of 0.8% and Q2 growth of 0.4%, instead we got 0.5% and 0.2%. This is awful news for the chancellor.

But underneath the headline number there is an even bigger story.

The rebalancing of the economy that the chancellor has been so quick to praise seems to have (hopefully temporarily) stopped. In the second quarter of this year manufacturing output fell by 0.3%, following strong growth throughout 2010. By contrast the biggest positive impact on GDP came from ‘business services and finance’. Manufacturing down, finance up – hardly the rebalancing we have been hoping for.

A near stagnant economy and no signs of rebalancing – not the news the Chancellor would have wanted this morning.