UK GDP: A nasty surprise and a puzzle

 
Chancellor George Osborne The contracting economy is putting pressure on the chancellor

Perhaps we shouldn't be so surprised. The Bank of England predicted that the extra bank holidays in June might knock half of a percentage point off the quarterly growth figure.

We also knew that the underlying rate of growth in the economy was weak to non-existent. Once you put those two things together, a 0.7% decline in national output in three months sounds at least plausible.

Many of the city analysts who were caught out by these figures are once again suggesting they are wrong, and likely to be revised. It is certainly hard to square these numbers with rising tax revenues and significant increases in employment. Business figures such as John Cridland of the CBI say the message they are getting from businesses on the ground is a lot more upbeat than this preliminary estimate would suggest.

But, these are disappointing numbers however you spin it. And they will inevitably add oxygen to the debate about the government's deficit reduction strategy - whether it has hurt the economy more than the chancellor expected, and whether and to what extent it now needs to be scaled back.

There is much talk about Britain being in the "longest double-dip recession since the war". But the double dip - the ups and downs in the figures over the past four years - is much less important than the overall result. If these numbers are right, the UK economy is now 4.5% smaller than it was before the recession started.

That would make this by some measure the worst four-year period for the UK, outside wartime, in at least 100 years - worse than what happened in the 1920s and 1930s, and worse than anything in the 1970s and 1980s (I've gone into these figures before).

Even if the figures are heavily distorted by short-term factors, they suggest the underlying state of the economy is flat, at best. They also suggest the economy has really not grown at all since the government took office in the summer of 2010. (In fact, today's numbers say the economy is now 0.3% smaller than it was then.) When the chancellor drew up his budget plans in May 2010, he was expecting the economy to grow by well over 4% in those 2 years.

Infrastructure legacy

Is Mr Osborne to blame for all that disappointment? That is what Ed Balls would naturally claim. In response, Mr Osborne would point instead to the difficult domestic legacy of the financial crisis, and the chilling effect on investment and bank lending from the crisis in the eurozone.

In effect, the IMF split the difference last week, with its estimate that fiscal tightening had caused Britain's national output to be 2.5% smaller than it would have been (though the Treasury would claim that some of that effect was incorporated in the original forecast).

I spent part of this morning interviewing the chancellor in King's Cross, on the construction site for the new Francis Crick Institute, a £620m project to build a major new medical research facility in the heart of London, which has been half-funded by the taxpayer.

It is was an interesting choice of location, and not just because it was Gordon Brown who originally approved the project shortly before the last election. George Osborne put the Crick Institute, along with other major public building projects, on hold when he came into the Treasury, but ultimately decided to go ahead with it.

Given the time lags, nearly every major infrastructure project is going to be the result of a previous government's decisions - maybe several. This was especially true of Cross-Rail, which he visited last week. (He's become such a fan of big building sites, I wonder whether the ONS is going to have to start adjusting the figures to allow for disruption caused by the chancellor.)

But you might wonder why Mr Osborne would want to associate himself so closely with a sector which has played a disproportionate part in this double-dip recession - and seems to have taken a disproportionate share of the government's budget cuts so far.

Government cuts

Today's figures show construction output down by 5.2% in the second quarter, and nearly 10% smaller than a year ago.

Obviously it's hard to quantify how much of that is due to government cuts. But we do know that nearly all of the roughly £10bn decline in government borrowing between 2010-11 and 2011-12 was down to cuts in government investment. And we know that the public sector accounted for around a third of total construction output in 2011.

Noble Francis, the chief economist for the Construction Products Association, has kindly pulled together some useful figures for me on this.

There is no breakdown between public and private sector activity for the second quarter, but the first quarter numbers show public housing output down 18% on the year, and public non-housing output (schools, for example) down 21% on the first quarter of 2011.

The figures for new orders are even more striking - especially when you consider that these are orders that will eventually filter through to output. New orders for public housing were down 41% on the previous year, and new public sector orders outside housing were 42% lower than a year before.

Some will say it's a bit rich for Labour to shout about this, when Alistair Darling had pencilled in cuts for public investment during this parliament that were every bit as large. But Alistair Darling is not now in charge and he hasn't been for two years.

Many will be hoping for a lot of medals for team GB in the coming games. George Osborne will be hoping for a big economic bounce from it as well. But the fact we are still focusing on one-off factors, worth a fraction of 1% of GDP, when we talk about UK growth tells you all you need to know about the dismal state of the economy.

 
Stephanie Flanders, Economics editor Article written by Stephanie Flanders Stephanie Flanders Former economics editor

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  • rate this
    +2

    Comment number 124.

    111 yyy

    I agree, tis a wriggle thru

    When you find you are going thru hell you just have to keep going - Churchill approximately

    Rebalancing decades of err err err cannot be done overnight

    JfH - I am well aware of the 19th century etc etc. BTW This relatively is a picnic re the 30s

    http://www.paydayloan.co.uk/Visual-News/is-this-recession-becoming-another-great-depression.html

  • rate this
    +3

    Comment number 123.

    114.yyyy
    Unfortunately, the whole UK economy is built on smoke & mirrors, since the 80's we have used credit to fund domestic consumption - and look where that has got us

    =>Yup. People fell for a con, buying more and expensive stuff with debt gave them the illusion of being wealthy. Now they're well and truly caught. Wage slaves

  • rate this
    -5

    Comment number 122.

    118. AD

    see 119.

    You are living in the unreality of a false belief set.

  • rate this
    0

    Comment number 121.

    Osborne and King are to blame.

    They have decided to save the banks and the financial reckless (BTL's) and sacrifice everyone else..
    This a decade of stagflation thanks to BoE...

  • rate this
    -3

    Comment number 120.

    I think the last governments have put a lot into education and generally young people are well equipped to enter the workplace. Maybe some reality needs to come into their lives but that is not impossible given the right input. What they need is opportunity....

  • rate this
    -1

    Comment number 119.

    #113 score

    Apparently some of you do not want to look at the historic parallel to our current situation. The Long Depression of the 1870s based on/caused by an unsustainable property bubble.)

    Why?

    Don't you want to learn from history?

    Do you want to make the same mistakes?

    Or perhaps,

    You don't like the answers?

    Living in cloud-cuckoo-land will not solve anything!

  • rate this
    +2

    Comment number 118.

    107 JfH

    1 Money is not cheap to borrow for Joe Public

    2 UK sov debt is low due to money fleeing the dodo euro, not much to do with GO

    3 The issue is where the money is, not volume

    4 S o' C @ 111 repeatedly reminds you re infinity and beyond

    5 'Competitive' low rates are the future for some time, get used to it

    6 UK Housing is a buffered descent to prevent bank collapse and ATMs shutting down

  • rate this
    +4

    Comment number 117.

    re#104
    Yes, been banging on about it [almost J_f_H style ;-)] for quite a while.

    Now is a good time to evaluate a lot of what we have been doing for the past 40-50yrs. The move to indirect taxation has, I think, been a disaster.

    We need to work out what size State spend we want and go for it with direct, progressive taxation. At same time, State must become much more efficient.

  • rate this
    0

    Comment number 116.

    111.soc

    All developed societies since the Phoenicians need functioning money. We do not have functioning money. Everything is mediated via money, so money has to be fixed.

    As to sustainability or moving to barter or cowrie shells or a post industrial society (a bankers' myth by the way) - for any or all of these we need money to work. It is broken so it must be mended!

    (Not have a zero price.)

  • rate this
    +3

    Comment number 115.

    How did Britain escaped from 1930's depression - one of 1st to do so
    UK managed this by some aggessive protectionism - as now used pro actively by every country in the world except the UK
    Neville Chamberlain was no coward - he was very clever as Churchill
    acknowledged during & after WW2
    There are lessons from history - even by adding up every economic statistic & making a 'GDP mess omelette'

  • rate this
    +3

    Comment number 114.

    @105 Arfur

    Unfortunately, the whole UK economy is built on smoke & mirrors, since the 80's we have used credit to fund domestic consumption - and look where that has got us, £trillions of debt; oh, and there are always those dodgy financial institutions of ours too....

  • rate this
    -5

    Comment number 113.

    108.AD

    Where is your analysis of the last similar depression (hint the 1873-1896 one) that shows that increasing debt achieved anything other than making things worse?

    Rates need to rise to reduce debt. see 109

  • rate this
    0

    Comment number 112.

    We have had Labour government for 12 years so of course the economy is in a mess cos as usual they smashed the ecomomy for their own sick reasons. Where are Brown and Blair now eh? Perhaps Ed Balls ex can tell us 'cos she knows nothing of economics.?

    So we get the Tories in to fix it (again) until the goldfish forget how corrupt and incompetant Labour are + vote 'em back in.

    Great innit?

  • rate this
    +2

    Comment number 111.

    106JFH like most commentators on this blog and most so called economic experts including Nobel prize winning ones you believe that fiscal and monetary policies are all that is required to fix our broken economic model. How about considering that real factors such as energy, assuming consumption and population have no limits and our post industrial revolution economic model are not sustainable?

  • rate this
    +1

    Comment number 110.

    The construction in London seems to be booming with new builds and large central blocks cleared in the last 6 months. With crossrail and probably HS2 its certainly not slow. So what state must the rest of the UK be in to reflect these numbers.

  • rate this
    -1

    Comment number 109.

    Both George Osborne & I agree that there is too much money about!

    His solution is to create some more & hope something good happens, when he really knows that the excess debt has to be deflated before we can get recovery.

    Why does he not do what economics demands?

    Politically he wants to stay in his job & this is more important than the fate of the country.

  • rate this
    +3

    Comment number 108.

    102 dbb

    No - Olympics is not an infrastructure project, it is a movable feast, a circus. Studies advised there would be no economic benefit, ignored. Essentially it is a vanity project. Much as I enjoy sport & enjoy the Olympics that is the situation. Infrastructure is more basic. Hosting the Olympics raises the probability of more medals, home ground

    BTW JfH 106 detailed = higher %rates LOL

  • rate this
    0

    Comment number 107.

    99 IS "Money has never been so cheap to borrow."

    True, but this also shows how worthless the money is! Things that have value have a non-nugatory (substantial?) price. This applies to money as a commodity.

    The collapse has been cause by too much, too cheap, money. Creating more exacerbates the problem and is not a solution.

    The cheap price of money also itself created too much money.

  • rate this
    -4

    Comment number 106.

    70 ymbr "I do expect there is some validity to your economic arguments - not sure how much though."

    I'd just love to lead you through the multitude of academic research & studies that lead me to arrive at my conclusion about cause (which incidentally is shared by GO or at least by the BBC editor who cut his contribution today)

    BUT

    The BBC have chosen to prevent any detailed discussion

    400ch

  • rate this
    -1

    Comment number 105.

    El Supremo Ambient Temperature Pasty Osborne is doing a better job than Head Balls but that doesnt say a lot

    It is painfully obvious that the manufacturing lead export driven idea was a load of twaddle from the word go. When Obama asked Steve Jobs if manufacturing was coming back he said No

    Domestic stimulus is the key. The issue is not public spending it is consumer spending. It is also housing

 

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