Analysis: GDP good news means precisely nothing
The double-dip recession is officially over – but don't be fooled. Britain's economic misery is far from over.
We've been here before. Three years ago, in the autumn of 2009, figures confirmed that Britain's GDP had crawled back into positive growth after five consecutive quarters of contraction. The sledgehammer of the 2008 financial crisis had smashed Britain's prosperity, but at least the ailing New Labour government had some good news for voters. The economy was no longer shrinking. The long recovery could begin.
It didn't work out so well, did it? After stuttering along with miserable levels of growth – it never got better than the 0.7% seen around the time of the 2010 general election – the much-feared double-dip recession finally became a reality at the end of 2011. The economy continued to shrink throughout the first half of 2012. Now, finally, figures have confirmed a return to growth in July, August and September, when GDP grew by one per cent. We can all breathe a collective sigh of relief.
Except we can't. This was about as artificial a recovery as you can get, as the Office for National Statistics has confirmed this morning. The Diamond Jubilee bank holiday of June 2011 was easily enough to knock 0.5% off overall output, meaning this quarter gets a healthy bump of the same amount. The Olympics, another one-off, will also have been very useful – ticket sales alone were enough to push up the overall figure by 0.2%. Underlying economic growth, once these extra factors are stripped away, becomes very limited indeed. Ed Balls' infamous flatlining gesture, which has wound David Cameron up in the Commons so much this year, seems as appropriate as ever.
The reality is that Britain's economy is still very, very fragile. Underlying growth is going to continue at around one per cent for the next 18 months or so. This is an improvement, but it is one which could have its own perils. Extra growth could mean extra inflation – especially as the indications are that food prices, particularly wheat prices, are set to rise in the coming months. Four of the big six energy companies have increased their prices by between six and nine per cent.
With the battered Bank of England's promises to deal with this having only limited credibility, its overall power to control the trend is commensurately damaged. Inflation will then put pressure on households struggling to pay their mortgages. If more defaults take place, banks could then go bust.
Sounds apocalyptic, doesn't it? It hardly fits with the "good news" being trumpeted by Conservative politicians led by David Cameron. Take falling unemployment, frequently cited as a positive development by ministers. This has baffled economists, but many believe it is a red herring. There has been a significant increase in part-time working, many of whom would rather be working full-time. And four out of five of the extra people who are self-employed are aged over 50. It's questionable whether they are all really working 40 hours per week, working as hard as you'd hope. More people in work does not necessarily translate to more money in the nation's collective pockets – or, by extension, tax receipts in the coffers of the Treasury.
The latter poses an enormous headache for the chancellor, who is preparing for his autumn statement on December 5th with extremely limited options. George Osborne is at least £30 billion short of his deficit reduction target. He has to do something to fix this, but the story of his 2012 is one of impotence in the face of everyday politics. The attempted tax rises and subsequent U-turns of the March Budget tell a grim story.
Those who had previously called for sweeping cuts have watched on with dismay, bitterly aware that most governments struggle to extend the political will for austerity drives beyond their first two years. Osborne is likely to come up with a series of small-scale, tinkering measures in December, seeking to placate as many as possible but with the ultimate goal of concealing his 'no changes' approach. He has no feasible political option but to stick to his guns. Clinging to the mast as the storm continues to rage might be a more appropriate metaphor.
As Britain's economy rolls on into 2013, facing new perils from inflation and further unpopularity as the spending cuts are increasingly felt by voters, the creaking coalition will find it harder and harder to win the political debate. Labour has not blinked in its claims that the harshness of the government's austerity drive has damaged the economy, hitting tax receipts and undermining the deficit reduction drive in the process. There are those who will continue to claim that austerity will always take place in times of economic difficulty; that is why they are needed in the first place, after all. On the doorsteps, though, which argument are voters likely to find more receptive?
That's why the "good news" that Britain is out of recession once again is nowhere near as good as Conservative and Liberal Democrats would like. In 2010 the coalition's partners hoped to deliver a thriving, prosperous Britain to the electorate by the spring of 2015. Halfway through their time in power, that seems hardly plausible – laughable, even, if the situation were not so bad. The end of the double-dip is a false dawn.
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