The drop in gross domestic product of 0.7 per cent in the second quarter of 2012 was greeted with incredulity by those who have been saying for months that the UK is not in a double dipper when we obviously are. Business and consumer confidence and lots of other measures have been in recession territory for a year. The latest industrial production figures suggest only a small upward revision. The economy shrank in five of the past six quarters, including all of the past three. GDP is now lower than it was when George Osborne became Chancellor in 2010. It’s time for the recession deniers to shut up.

The government’s current spending continues to prop up output. Manufacturing made  a negative contribution to growth in each of the past four quarters. Construction made the biggest negative contribution in the past two quarters, with declines of roughly 5 per cent in both. Disaggregated data for the first quarter shows that this was driven by declines in the value of public housing and non-infrastructure public spending (-11 per cent and -17 per cent, respectively, quarter on quarter; and -18 per cent and -20 per cent, year on year). This looks like a collapse in construction, driven by the coalition’s decision to kill off public investment. The evidence is that public investment crowds in private investment, contrary to the coalition’s bizarre claims that it crowds it out.

Decline and fall

The big decline in construction output has been questioned by some as not being plausible, even though there is a good deal of corroborating
evidence. The Bank of England’s agents’ reports show that it has been declining for months and is at levels previously seen only in the depths of recession in 2008 and 2009 (see chart 1). Many of the agents’ other scores, including those on capacity constraints, employment and investment intentions, have been declining through most of 2012 and are also in recession territory. These scores were good predictors of bad things to follow in 2008. The collapse in construction appears to be driven by the coalition’s disastrous decision to slash public investment.

The purchasing managers’ index (PMI) for construction in July showed a marginal rise in output, rebounding slightly from June’s two-and-a-half-year low. The data (see chart 2) is again at levels seen only in the recession of 2008-2009. This survey suggests that output rose for 18 of the past 19 months but is based on a small sample of big firms and may well be subject to a degree of survivor and optimism bias. No other evidence suggests this, including the new orders and output data from the Office for National Statistics (ONS), the RICS survey, or any of the industry’s sector-specific surveys.

Strong supporting evidence of a collapsing construction sector was provided by the latest trade survey from the Construction Products Association, which showed that during the second quarter of 2012 construction suffered another sharp fall across all parts of the industry, including current workloads, new orders and tender prices. Large and medium-sized building contractors reported that output in the second quarter of 2012 was lower than during the first quarter of 2011, which in turn was lower than the fourth quarter of 2011. Public-sector investment continues to decline, and the survey found no sign of private-sector recovery to offset these cuts, leaving little optimism for recovery in the near future. This was the fourth fall in the past five quarters.

The employment data is consistent with the picture of continuing decline in construction. According to the ONS’s labour force survey, used to calculate the unemployment rate, construction employment is down 2.8 per cent on the year, whereas private-sector employment as a whole is up 2.9 per cent. The number of employees in construction is down 6.6 per cent on the year; as a result, the self-employment rate in construction is up from 35 per cent in 2008 to 40 per cent in the first quarter of this year.

It is interesting to compare the performance of the UK labour market under David Cameron and Osborne with what has happened in the US. The latest data release showed that non-farm payroll employment in the US increased for the 22nd month in a row by 163,000 on the month. The presidential candidate Mitt Romney, who continues to put his foot in his mouth, said these numbers, which were much better than economists had expected, were a “hammer blow” to middle-class families. He probably mixed up the positive sign with a negative one.

Over the past two years, employment in the US has climbed by three million (a rise of 2.5 per cent); the number of unemployed is down by 1.7 million (12 per cent) and the number of long-term unemployed is down by a fifth. Employment in the UK over the same period is up by 200,000 (0.7 per cent); it has risen in only 12 of the past 22 months. Unemployment is up by 100,000 (5 per cent), while long-term unemployment is up by 120,000 (9 per cent). In job-creation terms, Barack Obama and his Treasury secretary, Timothy Geithner, easily beat Cam­eron and Osborne.

Gloomy weather

It seems likely that growth for 2012 as a whole will be negative and the Bank of England’s Monetary Policy Committee will again lower its forecasts for the next three years, having already downgraded expectations of 2012 output to zero. The National Institute of Economic and Social Research expects the economy to shrink by 0.5 per cent. The International Monetary Fund anticipates growth of 0.2 per cent.

This is a long way from the 2.8 per cent predicted for 2012 by the Office for Budget Responsibility in its cloud-cuckoo-land “emergency” Budget forecast of June 2010. I am expecting growth of below -1 per cent in 2012. The case for an immediate increase in public investment in infrastructure is building.