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  1. Politics
31 July 2010

US economic slowdown is a warning to Britain

New figures show fall in growth as economists warn that a double-dip recession remains possible.

By George Eaton

The coalition may be feeling confident after growth of 1.1 per cent in the second quarter of this year (a vindication of Labour’s fiscal stimulus), but the economic slowdown in the US should come as a warning.

New official figures revealed that the US economy grew at an annualised rate of 2.4 per cent in the second quarter, compared to 3.7 per cent in the first three months of this year. The new figures increase the risk that the Democrats will suffer a drubbing in this year’s midterm elections, not least because unemployment now stands at 9.5 per cent.

US economists expect growth to fall again in the third quarter, with some warning that a double-dip recession remains possible.

Gerard Lyons, chief economist at Standard Chartered, said: “Normally at this stage of the recovery we see confidence returning, but that just isn’t happening at the moment. Instead we see anxiety about the future and the outlook for sub-trend growth.”

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David Rosenberg, chief economist at Gluskin Sheff, warned: “The prospects of a double dip or some facsimile thereof were bolstered . . . by the contours of the second-quarter GDP report.”

Those economists such as Paul Krugman and Joseph Stiglitz, who have warned Barack Obama to resist right-wing calls to withdraw fiscal stimulus, are entirely correct. Even the IMF, not known as a bastion of Keynesianism, has said that the Obama administration may need to increase public spending in order to secure the recovery, warning that the “outlook remains uncertain”.

The danger for Britain is that the coalition is planning to do the complete reverse, slashing spending in pursuit of what a recent New York Times editorial accurately described as a “pointless structural Budget surplus”.

Growth of 1.1 per cent in the second quarter is likely to be as good as it gets for Osborne in 2010. Britain, like the rest of the world, can no longer rely on the US to act as the buyer of last resort.

So, a pity that, politically at least, those who argue for savage and ideological cuts in spending appear to be winning the argument.

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