The triple A versus the triple dip

Bus outside Bank of England bearing Broken City film ad Did austerity "break" the recovery?

George Osborne had a surprisingly good week. The UK economy did not.

Today's PMI survey in manufacturing shows a further decline in manufacturing activity in February. March could yet help turn things around, but if next week's survey of the larger services part of the economy is also weak, there is a distinct possibility that national output will shrink again, in the first three months of this year.

In other words, it is quite possible we will see that much talked-about "triple dip".

Just as worrying, perhaps, is the depressing news on exports in this survey, and the revised GDP figures earlier in the week.

As I mentioned on the 10 o'clock news on Wednesday, those new estimates suggest that the economy did see some growth last year, especially if you exclude our shrinking offshore oil sector.

But, far from supporting the recovery, our export sector actually pulled it down in 2012, with net exports subtracting about 0.8 percentage points from the annual rate of growth. Today's manufacturing survey shows new export orders declining in February, for the 14th month in a row.

On this evidence, we are not exporting our way out of depression. At all.

What can the chancellor do about any of this? That is the question we will all be asking, in these last weeks before the Budget. It is certainly a more important issue, for most people than the loss of Britain's AAA credit rating. (Indeed, for exporters that downgrade might even be helpful, at the margin, to the extent that it adds further downward pressure to the exchange rate.)

The chancellor came out fighting, on Monday, in the wake of that downgrade by Moody's. Where many around him - even in his own party - saw the loss of the triple A as a humiliating failure, Mr Osborne decided to see it as further confirmation that he had been right all along.

You might think that's stretching things a little. But the way Mr Osborne sees it, the coalition's strategy in 2010 was based on the idea that the hole in Britain's public finances would not fix itself, and could fatally damage the country's standing in world markets, if left to fester.

On this line, the Moody's decision shows just how right he was. The implication is that we would have lost the top credit rating even sooner, had Labour been in charge, with a somewhat looser approach to borrowing.

This argument is correct, on its own terms. Moody's certainly did not downgrade the UK because it felt that the deficit reduction programme had proceeded too quickly. It's the rise in the stock of debt that has them worried, not the pace of austerity.

However, critics of the government's approach, such as Martin Wolf of the FT, would say there's a hidden assumption in this whole line of argument. That is that there was no alternative approach that would have delivered faster growth - and maybe lower borrowing as well.

On this view, the argument over whether or not "austerity" killed the recovery misses the point.

The Bank of England and the Office for Budget Responsibility think the slow pace of growth since 2010 owes more to the eurozone and imported inflation than it does to Mr Osborne's tax rises and cuts in public investment.

Maybe they are right. But Mr Osborne's critics would say he might still have done more to offset these negative factors, and so produce a stronger a recovery.

If you believe the IMF's new, higher estimates for the so-called "fiscal multiplier" (and some do not), a stimulus programme, or a more growth-friendly combination of spending cuts and tax rises - with fewer cuts in public investment - might well have delivered faster growth after 2010, without making the fiscal situation any worse than it already was. Borrowing, on this scenario, might even have ended up being lower, thanks to faster growth in tax revenues.

This is, apparently, what Ed Balls believes. But he did not do a very good job of making the case in Parliament this week - which may partly explain why Mr Osborne came out of this week surprisingly well.

For economists, as opposed to politicians, there is not a lot of point debating what might have happened after 2010, and whether a different approach to the deficit might have brought more growth. We can't rewind the tape and do the last two years again. But there is all the reason in the world to think about what the authorities can do to support growth right now.

Clearly, the Bank of England is thinking about that quite hard. Three members of the Monetary Policy Committee voted for more quantitative easing last month - including the Governor himself. It might not take much more bad news for a majority to vote that way next week. And we know from testimony this week from Paul Tucker that other more radical steps are also being considered - at least by some.

Many in the city and in all of the main parties would like Mr Osborne to be thinking the unthinkable as well. He has shrugged off the loss of Britain's top credit rating, but the questions about what, if anything, he can do to kick-start growth are going to be harder to shake.

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

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  • rate this

    Comment number 112.

    Osbourne is just an upper class twit who has no clue about economics, or probably anything much else. In that respect he is fairly typical of the English ruling class who have overseen the last 50 years of national economic and political decline which I have no doubt will continue.

  • rate this

    Comment number 111.

    Manufacturing requires
    a) A small number of people (cheap in the UK)
    b) Space for a factory (hugely expensive)
    c) Finance to buy machinery, the factory and space (hugely expensive)
    d) Energy - This is the worst of them all - massively expensive and set to rise more because the government will not say no to the EU about shutting our coal powerstations.

    Compounded by the government buying foreign

  • Comment number 110.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • rate this

    Comment number 109.

    As long as we're not in the Euro we'll get by
    If we were in the Euro we would be like those other struggling Euro economies


    Not being in the Euro gives us hope

  • rate this

    Comment number 108.

    Manufacturing is NOT our way out of recession.
    There is no margin in it.
    IPR is what we need because it has huge margin.
    We didn't become the richest nation on earth by manufacturing stuff, as many people mistakenly believe, but by inventing stuff.
    Education is the horse we need to back.
    That is where our investment needs to go, starting with the abolition of higher education fees.

  • rate this

    Comment number 107.

    @ 102. Economic analysis does not lead to economic recession. Static domestic markets make a recession.

  • rate this

    Comment number 106.

    It is unbelievable that people can still defend Osbourne
    He is without doubt the most incompetent chancellor this country has ever had or ever will have.

    completeley useless

  • rate this

    Comment number 105.

    The depression will be long and deep if policymakers pretend it is just a big recession. So well done Steph for coming out of denial!

    Economic models are of little use now but economic principles can still be applied. Balance of Payments is our National deficit and has to be dealt with. If we can't increase exports then we will have to reduce imports instead, so support your local economy!

  • rate this

    Comment number 104.

    What does the UK excel at these days?

    We used to lead the world in so many areas and disciplines. I recently watched with great fondness a DVD of the history of the Fanrborough Air Show from the early 1950's to the present day.

    I watched a documentary recently about the demise and destruction of TSR2. Way way way ahead of its time!!. Over budget yes, but cutting edge costs money!

  • rate this

    Comment number 103.

    I've pointed out before that if you start with the wrong diagnosis of the problem (it was govt over-spending and too loose monetary policy that caused the crash not the banks) you end up with the wrong solution.
    Politicians cut themselves off from promoting the UK's most competitive and world class industry- financial services, and bet on globally uncompetitive manufacturing -casino politics!

  • rate this

    Comment number 102.

    "In other words, it is quite possible we will see that much talked-about "triple dip"."

    Yes much talked-about by lazy journalists trying to add some drama to their otherwise bland columns.

    Stop trying to talk us into another recession!

  • rate this

    Comment number 101.

    The very idea that we would export our way out of trouble was always laughable. Most of the World is swamped in debt & can't afford to buy what we produce - which these days isn't much anyway as our manufacturing sector has been decimated over the last 30 yrs. If you don't export much AND have a basketcase currency that imports inflation, hits savers, pensioners, investers etc then you are doomed.

  • rate this

    Comment number 100.

    93 drogstar

    Integrity?!! Just look at Huhne (politician), Pryce (economist) and the barrister/part-time judge involved in the case. Three careers down the drain for 3 penalty points, or £20 a throw. Such arrogance.

    Journalists are just as bad - "don't let the truth get in the way of a good story.
    The simple answer is don't trust any of them - don't be an idealist - always be pragmatic.

  • rate this

    Comment number 99.

    Part of the problem is there is sod all design or R&D work in this country. You can find some but it is very limited and most manufacturing is just putting together something for a foreign company.

    We have the skills and workforce but most engineers, designers and technicians move into other fields rather than compete for a few jobs in a drying market.

  • rate this

    Comment number 98.

    @96. RW49

    "As to Osborne, or indeed anybody else, being able to do anything about growth I don't see what. It either happens organically or not at all. Of course you can make it worse by taking money out of peoples' pockets."

    Ever heard of Franklin D Roosevelt???

  • rate this

    Comment number 97.

    Adding to my earlier comment @ 92. I do wish people could see that arguing for or against Labour/Tory is pointless. As a nation/a collective whole/you, me & most others- we got it badly wrong. We need a radical change in our culture & understanding of our place in the world & how we are going to survive & hopefully prosper. And it wont be through Govment spening or not spending more!!

  • rate this

    Comment number 96.

    Hello Steph. I'm glad you're back, sorry I missed your feature back on Wednesday's News at Ten. Still you're here now, it's given the trolls something to get their teeth into.
    As to Osborne, or indeed anybody else, being able to do anything about growth I don't see what. It either happens organically or not at all. Of course you can make it worse by taking money out of peoples' pockets.

  • rate this

    Comment number 95.

    What amazes me is Flanders along with the guy in charge and the rest of the media turn a totally deaf ear to the fact that spending money on foreign goods and giving it away in spades is damaging the UK economy. Buying Chinese plates for the royal wedding, using (and therefore advertising) German cars for the British olympics, using a US tax computer... ALL undermine our industry and our economy.

  • Comment number 94.

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

  • rate this

    Comment number 93.

    @86. economaster

    Its actually outrageous. Where's the critical thinking? Where is the journalistic integrity that should be ingrained in one of the senior newsnight journalists ( a program I actually like) that means they should ALWAYS seek to hold our leaders to account?

    Oh it happened...nevermind.... move along... nothing to see here....
    a complete whitewash.


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