Today’s downgrade means that in the five quarters since George Osborne’s autumn 2010 spending review the economy has flatlined.
See Chart 1:
The other headline figures from the ONS today (pdf) are:
• Output of the production industries fell by 1.3 per cent, within which manufacturing fell by 0.7 per cent.
• Output of the service industries fell by 0.1 per cent, while output of the construction industry fell by 0.2 per cent.
• Household final consumption expenditure increased by 0.4 per cent in volume terms in the latest quarter.
• In current price terms, compensation of employees rose by 0.9 per cent in the fourth quarter of 2011.
Shadow chancellor Ed Balls said of today’s figures:
“It’s now even clearer that last week’s budget not only made the wrong choice by asking millions to pay more so millionaires could pay less, it also made the wrong choice in sticking to policies that are failing on jobs, growth and the deficit.
“At the start of 2012 our economy should be doing more than just recovering the lost output at the end of last year. Months and years of flatlining or slow growth will make it harder to get the deficit down and cause long-term damage to our economy.”
Last month on Left Foot Forward, contrary to the talk about the contraction being a result of the eurozone crisis, retrenchment by households or government spending cuts, Tony Dolphin explained the real reason for the Q4 2011 GDP fall:
GDP contracted because businesses went into a funk, cut their spending and hoarded cash instead. Weak consumer demand earlier in the year, continued talk about austerity, and the risks – if not yet any direct effects – represented by the eurozone crisis together caused a fall in business confidence and willingness to spend.
This had already shown up in surveys showing they were cutting back on recruitment and investment spending – now it is emerging in the data too.
In Q4 2011, business investment fell by 2.8 per cent (taking 0.4 percentage points off growth), compensation of employees was cut by 0.3 per cent and there was a big fall in inventory building, taking 0.5 percentage points off growth.
Some surveys have suggested business confidence improved in January, pointing to a better outcome for GDP in the first quarter of 2012. However, the Bank of England’s survey of its local agents shows a different picture. In manufacturing and service industries, investment plans and employment intentions fell further in January.
If businesses remain in a funk and continue to hoard cash, it is likely to be touch and go whether we see another contraction in GDP in the current quarter.
And looking ahead, Vicky Redwood, chief UK economist at Capital Economics, told today’s Guardian:
“It looks as though the economy has managed to expand in the first quarter. Nonetheless, we still think that there are a number of reasons to doubt that the recovery can maintain the recent acceleration.”