Blow for Osborne as economy shrinks by 0.5 per cent

Fears of a double-dip recession return after economy unexpectedly contracts.

Most forecasters predicted economic growth of 0.4 per cent in the fourth quarter of 2010 but, as is often the case, the consensus was badly wrong. The economy actually shrank by 0.5 per cent, according to the first estimate by the Office for National Statistics.

George Osborne has inevitably cited the poor weather in the government's defence but even without the snow, the ONS says, growth would have been flat at 0 per cent. After strong growth of 0.7 per cent in the third quarter and 1.1 per cent in the second quarter (largely thanks to the last government's stimulus package and the Bank of England's ultra-loose monetary policy), the economy is running on empty again. Overall growth for the year was 1.4 per cent, significantly below the Office for Budget Responsibility's prediction of 1.8 per cent.

With the effects of the VAT rise yet to be felt and the spending cuts still to come in April, there is now a real risk of a double-dip recession – two successive quarters of negative growth. It's a good day for Labour to have Ed Balls, who has frequently warned of a double dip, leading the attack. But he should be careful this morning to strike a tone of concern, rather than one of vindication.

Meanwhile, as the graph I've put together shows, the spectre of stagflation – rising prices combined with falling growth – has returned.

GDP

The biggest difficulty for the government is that Osborne has few monetary weapons at his disposal. Interest rates are already at record lows and the exchange rate has fallen sharply since the crisis began in 2008. By contrast, as Robert Skidelsky noted in an essay last year for the NS, after the savage cuts of the 1981 Budget, Geoffrey Howe was able to loosen the money supply by cutting interest rates by 2 per cent.

Insofar as the government has a plan B, it is for further quantitative easing (QE). But with the cost of unsecured loans significantly higher than before the crisis, it is far from certain that another monetary injection will have the desired effect. Osborne is also under growing pressure from the inflation hawks to raise interest rates and avoid another round of QE.

For now, the government is sticking to its Thatcher-like insistence that there is no alternative. But if the next set of growth figures (published in April) show little improvement, Osborne will begin to come under significant pressure to postpone the cuts. The Chancellor's decision to declare hubristically last November that "the plan is working" now looks like a very poor judgement indeed.

George Eaton is political editor of the New Statesman.

Getty
Show Hide image

How Theresa May laid a trap for herself on the immigration target

When Home Secretary, she insisted on keeping foreign students in the figures – causing a headache for herself today.

When Home Secretary, Theresa May insisted that foreign students should continue to be counted in the overall immigration figures. Some cabinet colleagues, including then Business Secretary Vince Cable and Chancellor George Osborne wanted to reverse this. It was economically illiterate. Current ministers, like the Foreign Secretary Boris Johnson, Chancellor Philip Hammond and Home Secretary Amber Rudd, also want foreign students exempted from the total.

David Cameron’s government aimed to cut immigration figures – including overseas students in that aim meant trying to limit one of the UK’s crucial financial resources. They are worth £25bn to the UK economy, and their fees make up 14 per cent of total university income. And the impact is not just financial – welcoming foreign students is diplomatically and culturally key to Britain’s reputation and its relationship with the rest of the world too. Even more important now Brexit is on its way.

But they stayed in the figures – a situation that, along with counterproductive visa restrictions also introduced by May’s old department, put a lot of foreign students off studying here. For example, there has been a 44 per cent decrease in the number of Indian students coming to Britain to study in the last five years.

Now May’s stubbornness on the migration figures appears to have caught up with her. The Times has revealed that the Prime Minister is ready to “soften her longstanding opposition to taking foreign students out of immigration totals”. It reports that she will offer to change the way the numbers are calculated.

Why the u-turn? No 10 says the concession is to ensure the Higher and Research Bill, key university legislation, can pass due to a Lords amendment urging the government not to count students as “long-term migrants” for “public policy purposes”.

But it will also be a factor in May’s manifesto pledge (and continuation of Cameron’s promise) to cut immigration to the “tens of thousands”. Until today, ministers had been unclear about whether this would be in the manifesto.

Now her u-turn on student figures is being seized upon by opposition parties as “massaging” the migration figures to meet her target. An accusation for which May only has herself, and her steadfast politicising of immigration, to blame.

Anoosh Chakelian is senior writer at the New Statesman.

0800 7318496