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
    +1

    Comment number 344.

    20.
    fontainec
    25th July 2012 - 15:55
    In one word nonsense. Discounting The City 17% of all private Sector earnings comes from government spending. One of the reasons that the Private Sector are having a difficult time is because the government has cut not only the civil service but the number of contracts let to Private suppliers, Carrying your argument to its conclusion is Private Sector suicide

  • rate this
    +1

    Comment number 343.

    @342.Dr Bob Matthews
    "Any debt proved to have been created fraudulently pay it at the rate of 1% of its face value"

    I refer you to the (disagreeable in my humble opinion) Royal special status conferred on the BoE which means it does not even have to supply any returns to Companies House for a start. Secondly is the presence of PwC, KPMG, E&Y and Deloitte auditors... Good luck!

  • rate this
    0

    Comment number 342.

    294.
    John_from_Hendon
    26th July 2012 - 15:42
    Wrong John What we have to internationally is freeze the debt interest pending forensic investigation,If necessary do it without the US. Any debt proved to have been created fraudulently pay it at the rate of 1% of its face value, the scammers should be lucky getting that.Then dump the US$ as the reserve currency. Then watch commodity prices stabilize

  • rate this
    +1

    Comment number 341.

    319.
    Up2snuff
    26th July 2012 - 19:43
    Absolute tosh. You selectively avoid the issue of the banks salami slicing and packaging known worthless financial instruments to mix with partially good investment vehicles to dump on both speculators, other banks and investors. Goldman Sachs is a good example perfected industrial theft & they have helped destroyed economies.

  • rate this
    +2

    Comment number 340.

    So checking up on how Osborne will address the corruption and criminal activities of the financial sector...

    Banking Reform Statement by the Chancellor of the Exchequer, Rt Hon George Osborne MP...

    http://www.hm-treasury.gov.uk/statement_chx_191211.htm

    The answer is, nothing. This inactivity is of course contrary to Camerons statement regarding swift justice. NOT all in this together!!

  • rate this
    +1

    Comment number 339.

    The question is not that Gidons plan has failed that was a cert to start with, but why was he appointed? Was this to cover call me Dave's backside when as it looks it will all go T$ts up? Cameron may not be clever, but he has low animal cunning as Thatcher but in spades, this could be Cameron's get out of jail free card with his backbenchers. "Sorry guys, but he did swear he was good at numbers"

  • rate this
    +1

    Comment number 338.

    @336.Dr Bob Matthews
    "money is indeed debt created as debt for about the last 40 odd years."

    I think you're out on your estimate of 40-odd years by a factor of nearly 10. Tally stick being a notable exception which was created debt-free and is also, arguably, the currency which has been in use for the longest period of time.(c.600 years?). Contrast to Colonial Scrip which ultimately failed.

  • rate this
    +1

    Comment number 337.

    336 Well said Dr Bob. I doubt he can provide the figures and a reference because I suspect he just made it up as he was going along. Night night all.

  • rate this
    +1

    Comment number 336.

    328.
    Up2snuff
    No they are not. Go look at the numbers for people who carry NO debt!
    rather a foolish comment to make as money is indeed debt created as debt for about the last 40 odd years. So if you think you have 0 debt, stick your head back in the sand. If you have £1Million in the bank, show me the intrinsic value asset supporting your £1million? you can't because you know there is zero.

  • rate this
    +1

    Comment number 335.

    when are the "banking" fraternity, the City and Osbourne going to get the message that the ponzi scheme of fractional reserve banking has run its course and spectacularly failed QE is devaluation, creating money out of debt be it immediately or in the future is nothing more than sleight of hand & should be criminal.Speculation not investment drives the economies of the world, not honest business.

  • rate this
    +1

    Comment number 334.

    Money is as money does, John. The nature of money has changed. That's why the 1844 Bank Charter Act does not apply any more even though it hasn't been repealed. It forbids the creation of notes by any bank other than the BoE. Most money is now digital. The financial sector charges me lots of money in order for me to use their money numbers. Why am I forced into using their numbers? Mine are fine.

  • rate this
    +1

    Comment number 333.

    @250.cym100
    "Osborne is out of his depth - very much a one trick pony who I hope is shortly for the knackers yard"

    What was the trick? I think I missed it.

  • rate this
    +2

    Comment number 332.

    @331
    Anyone who thinks that the current debt problem can be solved using debt-based money is either an idiot or an economist.


    There's a difference?

  • rate this
    +2

    Comment number 331.

    328. Up2Snuff - done via threat of unemployt? Where'd you get that from? It's about reducing unnecessary systemic debt.

    "Go look at the numbers for people who carry NO debt!"

    Please provide the numbers and a reference. Did you even look at the money supply graph? Anyone who thinks that the current debt problem can be solved using debt-based money is either an idiot or an economist.

  • Comment number 330.

    All this user's posts have been removed.Why?

  • rate this
    -2

    Comment number 329.

    298satm

    What utter rot.

    Just because you have a silly nonsensical scheme that is based of no reality whatsoever you think that you can change several thousand years of what money is.

    As I am sure I have said before - don't waste your time.

    The routes out are (hyper) inflation + the complete destruction of society & social order or the controlled raising of interest rates to get the deflated.

  • rate this
    -2

    Comment number 328.

    @325
    '3 democratic options (a) Encourage pay down of private debt (b) Spend on infrastructure (c) Give directly to citizens'
    ~ ~
    a) done via threat of unemployt.
    b) takes time for extra spend
    c) that was my exception, BoE/HMT ruled out so far.


    'It's that money and debt are inextricably linked.'
    ~ ~ ~
    No they are not. Go look at the numbers for people who carry NO debt!

  • rate this
    +1

    Comment number 327.

    To all those who are interested in how long debates like this have been going on, and in particular, how long we have been waiting for a proper right to work, see here:

    http://bilbo.economicoutlook.net/blog/?p=12499

  • rate this
    +1

    Comment number 326.

    The country gaves a double D wobble effect that is as predictable as the union jacks fluttering in the Olymplc breeze. Alltaxes for those on less than 50k should be withdrawn, profit should be taxed at 100% unless invested in UK infrastructure, Banking and Finance profits should be returned to customers and owners and investors left to rely upon stock prices. Why is an interesting discussion.

  • rate this
    +2

    Comment number 325.

    319 Up2Snuff wrote - "Govt can't put money in popn's hands and make them spend instantly."
    Who said instantly? 3 democratic options (a) Encourage pay down of private debt (b) Spend on infrastructure (c) Give directly to citizens

    'Up2Snuff wrote -"Twas excessive shopping that helped us into this mess anyway." No. It's that money and debt are inextricably linked. I thought you said you voted MR?

 

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