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UK plc has made back the income it lost – nothing more. This does not count as a recovery; it is more of a stabilisation
The following statement sounds unbelievable, yet it is true: yesterday, the GDP report confirmed that the UK economy has essentially flatlined since autumn; David Cameron described it as "good news". The inevitable question arises: what would the prime minister consider bad news? Because even Doctor Pangloss would struggle to greet that grim GDP release with a smile.
The line the government is keen to push about yesterday's report is that the economy grew 0.5% in the first three months of this year. Yes, not everything is picture-perfect, but manufacturing is going great guns, and the service sector is not far behind. And even if the figures show construction falling off a cliff, the statisticians might well be wrong. This is the story that Mr Cameron brought out at prime minister's questions yesterday; the first problem with it is that it is flatly contradicted by the chief statistician at the Office for National Statistics, Joe Grice, who yesterday morning described the economy as having been "on a plateau" since last summer. Yes, national income rose 0.5% in the three months to the end of March – but it slumped 0.5% in last winter's terrible snow. So all that has happened is that UK plc has made back the income it lost – nothing more. This does not count as a recovery; it is more of a stabilisation.
The second problem with Mr Cameron's story is that these figures are disappointing even by the reckoning of his own Office for Budget Responsibility. Just last month, the OBR – which now supplies the Treasury's macroeconomic forecasts – predicted that the economy would have grown 0.8% in the first quarter. There is more behind this than just a clash of numbers: the UK is actually underperforming. Two years out of a recession, the economy should be powering ahead, in a classic V-shaped recovery. Instead of which, the economy is limping along in what looks more like an L-shaped journey.
To reiterate, these figures are for the period from January to March – that is, before George Osborne's austerity programme began in earnest this month. They show the impact of this January's increase in VAT but not the other tax rises and spending cuts that have only just kicked in. This picture then is of an economy already in a perilously weak condition even before Whitehall, town halls and other parts of the public sector started making their biggest cuts. Against this backdrop, many Treasury ministers would be thinking about changing their strategy. Mr Osborne has yet to produce a Plan B – despite calls from the Institute for Fiscal Studies and others. Yesterday, Jonathan Portes, former chief economist at the Cabinet Office, reiterated his call for "scaling back" the "fiscal overkill". Mr Portes worked in a senior policymaking capacity with coalition ministers until recently; his intervention deserves to be taken very seriously.
Instead of which, the government talks about the need for a growth strategy and unveils changes to the planning laws. The problem with this is threefold. One, the greatest threat to the economy at the moment is of insufficient demand – of families not buying things (for fear of job losses) and businesses not investing. Fiddling with what economists call the supply side will not help with that. Two, under Thatcher and Blair there have already been successive "bonfires of the red tape" and all the rest. And three, any payback from these reforms is likely to take a long time to materialise. What is needed now is another shot of government spending, or at least an easing of the spending cuts; but that is a political impossibility, given Mr Osborne's rhetoric that any such thing would be reckless.
Meanwhile, unemployment continues to rise and wage rises are not keeping pace with high inflation. Cabinet colleagues of Mr Osborne report him remarking that the economy is broadly "on the right track". What would he consider the wrong track?
