UK GDP: A nasty surprise and a puzzle

Chancellor George Osborne Image copyright PA
Image caption 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.