UK economy’s fourth quarter contraction confirmed

George Osborne has shown a great deal of determination in his efforts to tackle the fiscal deficit; it is now time for him to show the same determination in promoting output and employment growth.

Figures released by the Office for National Statistics (ONS) today confirmed that the UK economy contracted in the fourth quarter of 2010. Real GDP shrank by 0.6 per cent – a little more than the 0.5 per cent decline that was originally reported. Economic activity in the UK appears to have been badly affected by December’s atrocious weather (more so than in the US and Germany, for example, where the weather was also terrible, but GDP increased by 0.8 per cent and 0.4 per cent respectively).

The ONS’s statisticians believe that around 0.5 percentage points was knocked off UK growth by the weather in the fourth quarter. Even so, there would still have been a slight fall if there had been no disruption. The underlying trend is, therefore, worrying; growth was 1.0 per cent in the second quarter of 2010 and 0.7 per cent in the third.

The details released for the first time today show exports of goods and services remain the bright spot in the economy. They increased by 2.3 per cent in the fourth quarter and were 6.4 per cent higher than a year earlier. But imports are also increasing strongly – by 3.0 per cent in the quarter and 9.0 per cent over the last year. Net trade was, therefore, negative for growth.

Despite the boost to competitiveness from sterling’s decline in 2007 and 2008, the UK remains some way from the hoped-for trade-led recovery. Domestic private spending was very weak; consumers cut their spending by 0.1 per cent and investment dropped 2.4 per cent. Overall growth would have been even worse if government spending had not increased by 0.7 per cent (adding 0.2 percentage points to growth).

Given the contribution from government spending is about to turn negative, it is important to understand what caused the slowdown in private demand in the second half of 2010.

Higher oil and food prices probably played a part. These are squeezing households’ spending power. More money is being spent in supermarkets and petrol stations and on fuel bills, leaving less for other goods and services. But real earnings (excluding bonuses) peaked in early 2009 and have been declining for almost two years; they cannot be the whole story.

What did change dramatically in the second half of 2010 was fiscal policy. Plans to increase VAT to 20 per cent from January 2011 and a four-year programme of substantial cuts in public spending were announced.

Most of these cuts only take effect from 2011 onwards, but it is likely that they began to affect confidence towards the end of last year. Businesses have become less confident about increasing their capital spending or taking on more employees; consumers are less confident about borrowing and more inclined to make precautionary savings.

To turn around confidence now is going to prove extremely difficult, particularly given the effect of turmoil in North Africa on the oil prices and the very real prospect of the Monetary Policy Committee increasing interest rates later in the year. What is needed in the Budget on March 23rd is a ‘Plan B’ – a strategy that promotes investment, innovation, job creation and regional development. Deregulation, cuts in corporation tax rates and the hope of a trade-led recovery are not enough, on their own.

George Osborne has shown a great deal of determination in his efforts to tackle the fiscal deficit; it is now time for him to show the same determination in promoting output and employment growth.

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25 Responses to “UK economy’s fourth quarter contraction confirmed”

  1. Pedro Lara

    RT @leftfootfwd: UK economy’s fourth quarter contraction confirmed: reports @ippr's Tony Dolphin

  2. Patrick Silla

    RT @leftfootfwd: UK economy’s fourth quarter contraction confirmed: reports @ippr's Tony Dolphin

  3. Will Straw

    Are cuts crowding out business investment? @ippr's Tony Dolphin explains today's worse-than-expected growth figures

  4. John Taylerson

    RT @leftfootfwd: UK economy’s fourth quarter contraction confirmed

  5. Jonny Brogdale

    Presumably Gideon will attempt to explain that the snow was actually deeper than first thought?

  6. Tacitus

    But I thought the Tories told us that private enterprise would be our salvation and drive us out of financial hardship? You mean they lied??????

  7. Brum Against Cuts

    RT @leftfootfwd: UK economy’s fourth quarter contraction confirmed: reports @ippr's Tony Dolphin

  8. Notayesmanseconomics

    I thought that I would enter the debate on here as I am an economist who writes on the UK economy and I have some thoughts for you on todays figures.
    There are further underlying issues for us which will be a problem as we go forwards and this is my view from today.

    “These figures reminded me of a section from the most recent Monetary Policy Committee’s minutes which I quoted yesterday.
    Nominal domestic demand had increased by 6.8% in the four quarters to Q3, accompanied by nominal consumption growth of 6.3%, in part reflecting the VAT increase in January 2010. These were both above their average growth rates for the decade before 2007.
    My point is that if nominal domestic demand is surging at a rate shown above and yet real economic growth is turning negative then the gap will be filled by inflation.”

    Accordingly we face a period of stagflation with all the problems it poses and that is before any real austerity or spending cuts have begun.

  9. Cllr. Kevin Maton

    RT @leftfootfwd: UK economy’s fourth quarter contraction confirmed Oops a Cameron Blip or Trend. Spiral of decline?

  10. 0-i biz

    UK economy's fourth quarter contraction confirmed | Left Foot Forward

  11. For Free

    UK economy's fourth quarter contraction confirmed | Left Foot Forward

  12. Mark Stevo

    I’m not sure there’s a whole lot of new information here – growth was revised down from -0.5% to -0.6%, hardly an enormous change given challenging circumstances. Tony’s right to highlight the concerning trend, but almost all the evidence is pointing to a robust Q1.

  13. Kelvin John Edge

    RT @leftfootfwd: UK economy’s fourth quarter contraction confirmed: reports @ippr's Tony Dolphin

  14. inyourhouse

    I posted this in the comments over a Liberal Conspiracy, but I might as well post it here too:

    It’s quite clear to me that the Bank of England is largely to blame. It’s their job to stabilize aggregate demand growth (ie. total nominal spending on final good and services), but they have failed to do so once again. Although nominal GDP figures haven’t been provided by the ONS, the GDP deflator figure was 2.8% higher than in 2009 Q4. If real GDP was 1.5% higher, that implies nominal GDP was only about 4.3% higher. Given 2010 Q3 NGDP figures, that means that Q4 quarter-on-quarter NGDP growth was about 0.5% – that’s an annualized rate of only 1%. It’s really not surprisingly that real GDP growth was so poor given such poor monetary policy. For a start, that is significantly below the pre-recession trend of 5.5% per annum, but the BoE should really be aiming to get NGDP to catch-up to the level if would have been had NGDP growth never fallen from its trend value, which means the growth rate should be much higher. This graph illustrates my point:

    The BOE did a good job keeping NGDP growth stable until about 2008 Q1, but after that they allowed it to fall off a cliff. As you can see more clearly from this next graph, we need a lot more NGDP growth to get back to the pre-recession trend:

    When all is said and done, I estimate that had the BoE kept 2010 Q4 NGDP growth at its pre-recession trend of 5.5%, real GDP growth in Q4 would have been about 0.6% (2.3% annualized), which is only slightly lower than the 0.7% growth in Q3. I expect factoring in the impact of bad weather would raise Q4 growth above Q3 growth.

    tl;dr: BoE is largely to blame for the poor Q4 growth.

  15. David Nash

    tony dolphin on today's revised #GDP figures – snow or no snow, the downward trend is plain to see (+ v worrying) #ONS

  16. samuel4seaford

    On why a ‘Plan B’ is needed (March 23rd budget) by govt to promote investment, job creation & growth RT @leftfootfwd

  17. BenM

    @mark Stevo

    There is a wealth of new information here. Information that scuppers Yory hopes that the initial announcement was way out and that Q4 would be revised upwards.

    Reality scuppers the Tory fantasy again.

    Oh, and a “robust” Q1 off the back of an appalling Q4?? Whoopee-do!

  18. Mark Stevo

    I don’t see that, we knew that manufacturing would be revised down and construction would be tweak up, and there was a small surprise in the downward revision on services. Mist if the weakness was in December (which fits with the snow story). As for ‘robust’ growth, I expect it to be over 1% in Q1, so I guess we could debate whether that qualifies as robust.

  19. For growth, we need smart government | Will Straw – Marcus Evans Offices

    […] growth figures show that even accounting for December’s blizzards, the economy was in the deep freeze in the last quarter of 2010. Household consumption, business investment, and net exports all fell. The only component of GDP […]

  20. Will James Slater

    RT @leftfootfwd: UK economy’s fourth quarter contraction confirmed

  21. Kevin Richards

    "Can't blame the snow this time, David & George" – RT @leftfootfwd: UK economy’s fourth quarter contraction confirmed

  22. Mr. Sensible

    Just remember, it was the wrong type of snow…

    Osborne is just using that as a cover for the fact that his strategy isn’t working.

  23. Mark Stevo

    No, I think the view is probably still that weather had about a -0.5% impact. I’m not sure why folk have such a problem acknowledging that as a decent estimate, its not like the figures are blowing the doors off excluding it.

  24. Niki Grigsby Princip

    RT @AmericanLiberal: Austerity foolishness. RT @leftfootfwd: UK economy’s fourth quarter contraction confirmed: rep …

  25. Nick

    To blame the coalition for this is unreal. Economic performance is the result of several years previous management decisions.
    To blame Osborne is pure moronic politicising.
    The real traitor to the UK economy was Brown. Say what you like on these left wing sites. We, the people, shall not forget.

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