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29 March 2012

A recession warning for Osborne

The UK is forecast to recover at a slower rate than every G7 country except Italy.

By George Eaton

Away from pasties and jerry cans, there’s the small matter of our shrinking economy. Yesterday the Office for National Statistics revised growth for the final quarter of 2011 down to -0.3 per cent, today the OECD predicted that the UK will suffer a double-dip recession – defined as two consecutive quarters of negative growth. The economy is forecast to shrink by -0.1 per cent in the first quarter of this year.

And that’s not the only prediction to haunt George Osborne’s nights. As the OECD table below shows, the UK is expected to recover at a slower rate than every G7 country except Italy.

GDP growth in the G7 economies

Annualised quarter-on-quarter growth

A

While we’re forecast to contract by 0.4 per cent [in annual terms] in the next quarter, the US, where the Obama administration has maintained fiscal stimulus, is expected to grow by 2.9 per cent. Osborne’s previous boast that that the UK had grown faster than the US “despite fiscal stimulus in the former and fiscal consolidation in the latter” now looks rather foolish.

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As Adam Posen of the Bank of England’s Monetary Policy Committee noted in his speech yesterday:

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Cumulatively, the UK government tightened fiscal policy by 3% more than the US government did – taking local governments and automatic stabilizers into account – and this had a material impact on consumption. This was particularly the case because a large chunk of the fiscal consolidation in 2010 and in 2011 took the form of a VAT increase, which has a high multiplier for households.

Today, the Chancellor has responded by noting that “our own” Office for Budget Responsibility says the UK will avoid a double-dip. Indeed, the OBR predicts growth of 0.3 per cent in the first quarter of this year. Nonetheless, Osborne has already prepared his defence, insisting that “You can’t turn round the British economy overnight. It became very dependent on the City of London, very dependent on public spending which had to be borrowed and we have got to change that”. But after 15 months of no growth, how many will be willing to listen?

The politics of a double-dip could be more complex than many expect. At times of economic trouble, voters often look to the government, rather than the opposition, to see them through the storm. After all, despite the near absence of growth since Osborne took the helm, the Tories retain a four-point lead over Labour as the best party to manage the economy.

Conversely, a double-dip could be the point at which the Tories are finally forced to “own” the economy, no longer able to blame “the mess” they inherited from Labour or the eurozone crisis. “The man who took us back into recession” is not an attack line that Osborne will want to hand Ed Balls. He and the rest of the coalition face a nervous wait until 25 April when the ONS publishes that all-important figure.