Eurozone crisis not to blame for sluggish growth

Ministers are trying to claim that the eurozone is to blame for fragile growth. But it is falling consumption and poor investment that is the problem.

Growth in GDP and its components; click to enlarge

Rahm Emanuel’s dictum that “you never want a serious crisis to go to waste” is being attempted this morning with the kind of chutzpah that would make Obama’s first chief of staff proud. Today’s Independent reports that, “Cabinet ministers fear that the turmoil in the eurozone will weaken Britain’s already fragile recovery“.

While it is certainly true that a deepening of the eurozone crisis could prove catastrophic for the UK economy, it should not be used as an excuse for sluggish growth in the second quarter if independent forecasters are proved right on Tuesday when the ONS will release their estimates for growth in April, May and June.

The OBR is virtually alone in expecting growth in 2011 of 1.7 per cent while figures released by the Treasury earlier this week show that 1.3 per cent is the average of new industry forecasts. But looking in even more detail at the analysts’ expectations shows that it is a drop in private consumption and fixed investment, rather than a drop off in net exports which is to blame for the sluggish growth.

As the table below shows, the OBR was expecting consumption to grow by 0.6 per cent, investment to rise by 2.3 per cent with net exports growing by just 0.7 per cent. By contrast, the average of new forecasts suggests that consumption in 2011 will fall by 0.4 per cent and investment will rise by just 1 per cent. Meanwhile, they believe that net exports will rise by 1.3 per cent – higher than the OBR’s own predictions.

Vince Cable claimed this morning that:

“The danger is this crisis spreading. It is a danger to the UK because half of our exports are to the EU countries. If there is a major unresolved crisis in the eurozone it will have massive implications on our trade and even more the potential threat to financial stability through the banking system.”

He may be right. But dont for a second let him or his Tory colleagues use the eurozone crisis as an excuse for sluggish growth now. For this, the blame lies squarely at their own door.

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  • Selohesra

    Perish the thought – It would be like Gordon and the last lot blaming on outside factors – after all it all started in America

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  • Ash

    Too right. Over the next few years we are going to be hearing a lot of ‘it’s not our fault, it’s the Eurozone Crisis.’ That will be partly true, but only partly. The blame for the past three quarters of stagnation lies squarely at Osborne’s door, and if we end up in a recession that Osborne tries to cut his way out of, he will be responsible for exacerbating that recession too.

    The oh-so-trivial difference between Osborne and Brown, Selehesra, is that under Brown the economy tanked *after* a global economic crisis, just as you might expect. Under Osborne, growth has stalled *before* any such crisis, at a time when we could reasonably have expected the economy to be ‘bouncing back’ fairly strongly (as indeed it was prior to Osborne taking the reins).

  • Mr. Sensible

    Agreed Will; the economy is already struggling under this government without any “help” from the eurozone.

  • J from Wpg

    Emanuel may have said “you never want a serious crisis to go to waste” but it is not his dictum. I first heard it said in 1995 by John Snobelen, a Conservative Education minister in the Province of Ontario. I believe he was quoting a dictum from the University of Chicago School of Wing Nuttery.

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