The double-dip begins


 

Real GDP in the UK fell by 0.2 per cent in the final quarter of 2011 according to figures released today by the Office for National Statistics.

Growth in 2011 as a whole was 0.9 per cent. Growth over the four quarters ending in 2011 Q4 was 0.8 per cent, though this figure is flattered by comparison with the final quarter of 2010, when output was hit by particularly bad weather. Underlying growth over the last four quarters may have been as low as 0.3 per cent.

In the final quarter of 2011 output of production industries fell by 1.2 per cent, probably as a result of large-scale destocking (there are very few details available at this point). Output of construction industries was down 0.5 per cent, while output in the service sector was unchanged.

The recovery from the 2008/09 recession continues to be slow and uneven. Real GDP has increased by 3.5 per cent since the second quarter of 2009. Over comparable periods after the last two recessions, real GDP increased by 7.1 per cent in the 1980s and by 8.8 per cent in the 1990s.

There are various explanations for this poor performance.

First, this is a different type of recession and recovery. Economists have shown that recoveries after recessions that are caused by the bursting of debt and asset bubbles tend to be relatively slow. The present UK experience is adding another case study to their collection.

Second, higher commodity prices during 2011 squeezed households’ spending power and reduced domestic demand growth.

Third, the government’s belief that it could cut its deficit aggressively because the private sector would fill the gap has proved wrong, as the latest employment figures show. While public sector employment fell by 67,000 in the latest quarter (to September), the private sector created only 5,000 net new jobs.

Unsurprisingly, despite the government’s optimism, the more the government talked of austerity, the more reluctant companies have been to step up recruitment or make new investments.

Fourth, the euro zone crisis has also affected business confidence, particularly of exporters. Again, this will have been bad for jobs and bad for investment.

In the short term, as I have been warning for some time, things are unlikely to get much better.

There is some good news: energy firms are bringing down their charges and petrol prices have fallen. This will ease the squeeze on households’ spending power.

But, as the IMF warned only yesterday, when it revised its forecast for growth in the euro zone in 2012 down from +1.1 per cent to -0.5 per cent, the euro zone crisis is an increasing threat to the global economy. Meanwhile, the government is sticking stubbornly to its deficit reduction plans, meaning further cuts in public sector jobs and taking more demand out of the economy.

With public sector austerity at home and a potential crisis in the euro zone on their doorstep, it seems unlikely the private sector will step up its recruitment or investment plans any time soon.

Together, these GDP figures and the short term outlook suggest the UK economy has slipped back into recession. The feared ‘double-dip’ began in the final quarter of 2011.

See also:

When the private sector collapses for a second timeCormac Hollingsworth, January 19th 2012

Manufacturers still fear a double-dip recession in 2012Tony Burke, December 23rd 2011

More grim news: Economists predict UK will be back in recession in 2012Alex Hern, December 12th 2011

Stories from the economy, or: The prospects for young people, and other grim talesRichard Exell, November 17th 2011

IMF boss repeats call for Plan BWill Straw, September 5th 2011

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