The GDP figures for the third quarter have just been released and there’s good news for the coalition. The economy grew 0.8 per cent in the three months to September, down from 1.2 per cent in the second quarter, but twice as fast as most economists predicted.
Ministers will be relieved that we’re not in double-dip territory and George Osborne can proudly point to out that today’s 0.8 per cent figure is the highest Q3 growth since 1999. Crucially for the coalition, four-fifths of the growth was in the private sector: ministers will cite this to support their claim that the sector can pick up the the slack. But with the VAT rise and the cuts yet to come, the coalition’s overall approach has barely been tested. We can expect major job losses in the private sector as public-sector contracts dry up.
And don’t forget, as I wrote yesterday, that Osborne’s room for manoeuvre is extremely limited. The Bank of England cannot reduce interest rates much further and the exchange rate has fallen sharply since the crisis began in 2008. By contrast, as Robert Skidelsky points out in this week’s issue, after the savage cuts of the 1981 Budget, Geoffrey Howe was able to cut rates by 2 per cent and prevent a precipitous economic decline. Should growth turn negative, Osborne’s only option (other than “reprofiling” the cuts) is further quantitative easing by the Bank of England.
Labour figures hoping for an opportunity to claim that Osborne is strangling the recovery at birth have lost out today. But with the latest Populus poll showing that most voters believe the coalition’s cuts are both unfair and unnecessary, there is still a large constituency for an alternative approach.
And with the biggest spending cuts and tax rises still to come, the argument has only just begun.