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21 January 2012updated 26 Sep 2015 9:01pm

Growth, not the deficit, will define the economic debate in 2012

And the left need to be ready to take charge of the discussion

By Tony Dolphin

George Osborne reminded us earlier this week that figures for GDP growth due to be published on Wednesday could show the economy contracted in the final quarter of 2011, though he was quick to point out that he had not yet seen the figures, nor was he making his own forecast; he was simply restating the view of the independent Office for Budget Responsibility (OBR).

If GDP did shrink in the final quarter of 2011, then the UK economy could be back in recession, based on economists’ definition of a recession as two consecutive quarters of declining GDP (though we will have to wait until April to find out if this is really the case). Alternatively, it may be that the economy was flat, or even grew slightly, in which case a recession will technically have been avoided.

However, by focusing on the quarter by quarter numbers, we risk missing the bigger picture. Whether growth in the final quarter of 2011 turns out to have been -0.1 per cent or +0.1 per cent does not change the fact that since the Chancellor set out his austerity programme for the public sector last year, the economy has grown at an anaemic pace.

As a result, the economic recovery has been blown off course. In the first five quarters of recovery from the recent recession – that is from 2009 Q3 to 2010 Q3 – real GDP increased by 3.2 per cent. This is pretty much in line with experience following the two preceding recessions, which, in the first five quarters, saw growth of 3.1 per cent in the 1980s and 3.0 per cent in the 1990s.

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But, while the economy recorded growth of 2.7 per cent in the following year of the 1980s recovery and 4.8 per cent in the following year of the 1990s recovery, growth in the UK over the last year has been just 0.5 per cent. If the OBR’s forecasts are right, not just for the last quarter of 2011, but also throughout 2012, then this recovery will lag further behind the previous two (the chart includes OBR forecasts for the period 2011 Q4 to 2012 Q4).

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This is not all the Chancellor’s fault – though the pace of deficit reduction and his austerity rhetoric were contributory factors. The main cause of weakness in high street spending was that people had to spend more on their energy bills and petrol. More recently, the eurozone debt crisis has created uncertainty for businesses, leading to a greater reluctance to make capital investments and recruit additional workers. But weak growth in the UK enabled his opponents to argue that the Chancellor’s policies were not working.

What happens in 2012 will depend, to a large extent, on developments in Europe. Petrol prices are already falling and a number of energy companies have announced cuts in their tariffs, so the squeeze on households’ spending power looks set to ease. This will support high street demand. But if there is no resolution to the euro zone crisis, confidence will remain depressed and growth is likely to be little better than in 2011 (and if the crisis worsens, then there will probably be no growth at all).

If the economic recovery does pick up pace during 2012, the Chancellor will no doubt trumpet the success of his policies and it will be harder for his critics to be heard. But another year of little to no growth will lead to more calls to the Chancellor for a change of course on deficit reduction (calls that will almost certainly be ignored) and create an environment in which an alternative, growth-centred, economic strategy would get a fair hearing in public debate. If this opportunity arises, the centre-left needs to be ready to seize it.

Tony Dolphin is the senior economist and associate director of the think tank ippr