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 Article written by Stephanie Flanders Stephanie Flanders Former economics editor

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  • rate this

    Comment number 312.

    To quote Alistaire Campbell, "I am banging on here." This is my third comment.

    Please tell the public the good news. There was no double dip recession in 2012, rather GDP was up 0.3%.

  • rate this

    Comment number 311.

    19. diskodave

    "How can we export anything, when all our manuafcturing has been closed? Get the manufacturing up and running again, then we can export. Be proud of British made items...."

    Have just had a look at my British made possessions and yes, I am proud of them.

    All at least forty years old and still going strong.

  • rate this

    Comment number 310.

    All is not lost. I have - with my very own eyes - seen green shoots of revival.

    Just a shame that they are on my Rambling Rose I had cut right back last season.

    Is Osborne watching my garden I wonder.
    Hoping for his cuts to have the same effect.
    I'll gladly lend him my secateurs and gloves.
    Only if he uses them on himself though...
    Or the Horse dung I used on the other roses.

  • rate this

    Comment number 309.

    What a clever government we have.

    Signs of downturn:
    Airlines cutting flights. - We can not afford them, And the cost of fuel is going up.
    We cannot afford to defend ourselves. Just as well the Olympics has gone.
    The EU, of all people, is reining in our virtually useless banks.
    All on top of virtual shops.

    We now have virtual air travel and defence.

    Coming from a virtually useless government..

  • rate this

    Comment number 308.

    Typical of Stephanie to ignore the recent research that shows there wasn't a second dip, so we can't be heading for a triple dip.

  • rate this

    Comment number 307.

    re 284
    it would certainly be folly to imagine infinite spending
    how about sufficient spending to fully utilize those who want to
    work more?

  • rate this

    Comment number 306.

    Clearly, Osborne wants inflation. It will reduce the effective debt.

    Why else would he limit benefits to 1% and not keep them linked to inflation?

  • rate this

    Comment number 305.

    "It's ironic that NEST has been introduced during this depression."

    How long before the government is taken to court over its own pensions mis-selling scandal?

  • rate this

    Comment number 304.

    As a UK exporter, what has the devaluation of the £ done for me?

    Has it increased my competitiveness? No, like many UK exporters, I compete on quality rather than cost

    Has it increased my income? No, my charges are already set in £

    It has instantly increased costs of my non-UK suppliers, travel, transport, etc.

    Was the devaluation intended to help us to export or to bury some govt debt?

  • rate this

    Comment number 303.

    The government is determined to undermine growth because it refuses to Tax the wealthy. The poor HAVE to spend but the wealthy can save. The triple dip is a myth we are in DEPRESSION and the people must realise it then the sooner we can get to changing this government's policy! This country needs to spend money on improving infrastructure and ensuring true competition. Sadly this will NOT happen!

  • rate this

    Comment number 302.

    I would have said that myself if I'd been able to understand. 282's posting
    (I'm obviously not as bright as I thought I was)

    Deficit reduction is important
    but can't be achieved without growth or (&) exports
    (& we haven't got enough of a manufacturing industry which can make the goods we need to export)
    The good firms we have are very, very good
    there's just not nearly enough of them

  • rate this

    Comment number 301.

    298 Is it too late to re-nationalise?
    Are we too broke?

    Big investment/changes are best made at the height/peak of your company/country. All big changes take time. There are great british companies out there but, not nearly enough to impact in the short term.

  • rate this

    Comment number 300.

    Economists and statisticians will continue to grow their model of reality in order make it look like they know what is/has been/ going on.

    Meanwhile the bankers do the same but are one step ahead of them in order that the hapless us can be fleeced.

    Politicians meanwhile think me too and jump onto the band wagon

    Makes no difference though.
    The hapless us pick up the pieces and give to them all.

  • rate this

    Comment number 299.

    @282 DevilsAdvocate Public and private sectors both need to reduce their deficits and that can only be achieved by reducing the external deficit. That's why we HAVE TO increase exports and HAVE TO reduce imports. Fall in sterling might help a bit but won't be enough on its own.

  • rate this

    Comment number 298.

    The things I could never understand with nationalised industries were;
    Why the public couldn't understand that keeping someone in (overstaffed) employment was better than having them unemployed
    Why the job of making these 'businesses' profitable couldn't have been done whilst they remained in the public sector so that the profits went back to the state for future re-investment?

  • rate this

    Comment number 297.

    There is no logical reason why this country does not have an Apple inc. or a Microsoft, or Audi, or an endless list of established engineering interests. No reason whatever. An AppleUK could fall to earth tomorrow but for the fact that the UK population does not buy the goods made here. I raged yesterday at the cranes imported from Chins. That is as insane as we have become in UK.

  • rate this

    Comment number 296.

    295 "Old Nat Industries....."

    Yes,come full circle in 30 years. They needed modernising and privatisation helped this. Now the opposite - need re-nationalising. Won't necessarily be any cheaper but would be in the nations interest for the next 30 year cycle.

  • rate this

    Comment number 295.

    In the (bad) old days of nationalised utilities & transport there was a lot of overstaffing
    This was seen as a bad thing & so when these firms were privatised, the 1st thing they did was sack the excess staff & transfer that burden to the UK benefit system
    These firms are now businesses & MUST return a profit
    They no-longer have a vested interest in the national well-being or OUR futures

  • rate this

    Comment number 294.

    291 China is growing and adds the equvalent of another UK economy each seven years. They have an undeveloped economy which can grow exponentially, restricted only by policy and resources.

    We cannot rebuild the UK because of contractual liability and established interests. We must though find a means to renew our economy.

    Re-balancing it is very much less that the words mean, grow or collapse.

  • rate this

    Comment number 293.

    As Groupon shares fall, and Republic gets taken, and we get taken with energy prices - the bankers see no reason why they should not continue taking their bonuses.

    It should be obvious to all by now that the bankers are a law unto themselves, they think the whole world owes them a living.

    Cameron obviously thinks so.

    Just how much are they going to take from us all before we say enough, enough?


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