In the end, it was even worse than expected. The Office for Budget Responsibility predicted that the economy shrunk by 0.1 per cent in quarter four of 2011 but this morning’s preliminary figures show that it shrunk by 0.2 per cent. What’s more, the detailed breakdown of the figures shows that without a rise in “government services” such as health and education, which were up by 0.4 per cent on the quarter, GDP would have fallen even faster, by 0.3 per cent. So much for a private sector-led recovery. Should the economy contract again in this quarter, Britain will officially be back in recession.
The negative figure was, as the Treasury noted, hardly unexpected. Indeed, George Osborne had prepared the ground in his Autumn Statement, warning that “if the rest of Europe heads into recession, it may prove hard to avoid one here in the UK.” But that does not make it any more less unpalatable for the Chancellor. His 2010 promise of “a steady and sustained economic recovery, with low inflation and falling unemployment” is a distant dream. Unemployment is heading towards three million, debt has reached £1 trillion and, in the last year, the economy has grown by just 0.8 per cent, one of the slowest rates in Europe. Conversely, over the previous year, partly thanks to Labour’s fiscal stimulus, the economy grew by 1.6 per cent.
The lack of growth will make it even harder for Osborne to meet his deficit reduction targets, forcing him to add to the £158bn of extra borrowing already announced. It will also, inevitably, revive speculation that the UK could lose its AAA credit rating. Explaining its recent decision to downgrade the ratings of nine eurozone countries, Standard & Poor’s cited concerns over growth, not borrowing. “A reform process based on a pillar of fiscal austerity alone risks becoming self-defeating,” it warned. And in the case of Britain, there is plenty to be concerned about.
In political terms, however, today’s figures may change little. Osborne will continue to stand by his deficit reduction plan and Labour will (rightly) continue to argue that the government is cutting “too far, too fast”. As you were, then. But while the Chancellor will probably be able to shrug off one quarter of negative growth it would be a lot harder for him to explain away the first double-dip recession since 1957. The pressure for a change of course could then become irresistible.
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