George Osborne told the cabinet yesterday that the economy is "on the right track". But today's GDP figures suggest that he has no right to be so sanguine.
The preliminary estimate from the Office for National Statistics suggests that the economy grew by just 0.5 per cent in the first quarter of this year, significantly lower than the forecast of 0.8 per cent from the Office for Budget Responsibility.
A stagnant economy
If you take into account that the economy shrank by 0.5 per cent in the final quarter of 2010, today's figures indicate that it hasn't grown for six months. A terrible performance, given that we experienced growth of 1.8 per cent over the previous six months. There is now a real possibility that the OBR will have to downgrade its 2011 growth forecasts for the fourth time.
Osborne may have avoided a double-dip recession (not much of an achievement), but the recovery remains stagnant. His economic strategy is to use loose monetary policy (interest rates and the exchange rate) to offset the effects of a tighter fiscal policy (spending cuts and tax rises).
But this approach works only if interest rates are high to begin with. For instance, following the savage cuts of the 1981 budget, Geoffrey Howe cut interest rates by 2 percentage points and the economy surged as a result. But when the coalition took office, interest rates were already at an emergency low of 0.5 per cent and have stayed there ever since.
There could be even worse to come. Today's figures cover the VAT rise, which came into effect in January, but not the spending cuts, which began in April. For now, there is little evidence that the coalition's austerity economics will deliver the robust growth that Britain so desperately needs.