It’s important not to read too much into one quarter, but Britain’s latest quarterly GDP data makes depressing reading. As Reuters notes in the report excerpted below, there were some one-offs that made the numbers look worse. Nevertheless the underlying trend is grim:
Britain’s economy shrank more than expected at the end of 2012 with a North Sea oil production slump, lower factory output and a hangover from London’s Olympics pushing it perilously close to a “triple-dip” recession.
The country’s gross domestic product fell 0.3 percent in the fourth quarter, the Office for National Statistics said on Friday, sharper than a 0.1 percent decline forecast by analysts… Britain’s economy is now 3.3 percent smaller than its peak in Q1 2008, having recovered only about half the output lost during the financial crisis – a worse performance than most other major economies. The country slipped back into recession in the last three months of 2011, and only emerged from it in the third quarter of 2012, after a boost from the London Olympics. After a bout of snowy weather in January – which is likely to have hit spending and output – the risk is that the economy will continue to shrink in the first three months of this year, technically pushing it into a rare “triple dip” recession….
Britain’s chief central banker Mervyn King expects no more than a “gentle recovery” this year, while this week the IMF cut its 2013 forecast for British economic growth to 1.0 percent from 1.1 percent predicted in October.
However, economists and business groups warn that even such lacklustre growth could be derailed by a hit to firms’ and consumers’ confidence from talk of a triple-dip recession.
The biggest driver for the fourth-quarter fall in GDP was a 10.2 percent drop in mining and quarrying output, the biggest since records began in 1997, driven by disruption from extended maintenance affecting North Sea oil and gas fields. This knocked 0.18 percent off GDP, while slightly smaller amounts of damage were done by falls in factory output and in the ‘government and other services’ category, where the Olympics had boosted sports and recreation services in the third quarter. Friday’s figures showed output in the service sector — which makes up more than three quarters of GDP — was flat in the fourth quarter. Industrial output was 1.8 percent lower.
A failure of austerity economics, then?
The petty pace of the recovery is, in some respects, deliberate. [Finance minister] George Osborne has chosen a slow path of consolidation — cutting less over five years (3.2 per cent) than Denis Healey did in one year when the Labour government was reforming its spending (3.9 per cent) at the behest of the IMF [in the 1970s]. It’s the fiscal equivalent of tearing a plaster off slowly, so as to minimise the pain. In 2010, Osborne thought he could do this and still pull off an economic recovery by 2015. It’s now clear this means he’ll be tearing off this plaster way into the next parliament. The government boasts that it has cut the deficit by 25 per cent, but Osborne knows this is no great feat. Our fellow chronic debtors — Greece, Ireland — have made far more progress. Even [former prime minister] Gordon Brown’s plan involved cutting the deficit by 36 per cent by now.
So what to do? Reversing the course of what austerity there has been would panic the country’s creditors (the UK’s AAA rating is already looking very shaky), driving up interest rates in a way that could easily cancel out any boost to demand from increased government spending. The pound will (I’d guess) carry on down, giving exporters a boost, but, beyond that, there’s nothing that offers the prospect of much relief other than a recovery in the global economy which, for the UK’s purposes, must include the crippled euro zone. That may take a while.
There are structural changes that could be put in place (slashing red tape and the like, except of course, for the huge bureaucratic burden that comes from the EU, which remains untouchable) but these would take time to have any effect. Scrapping the burden imposed on the country’s energy consumers by the government’s wasteful and futile greenery, and redirecting a large (and growing) overseas aid budget back home could each help a bit now, but Mr. Cameron is too stubborn to want to sink these unlovely flagships of his brand of Conservatism.
Even tougher times lie ahead, I fear.