Published on 27 Apr 2011

Pulling the snow over our eyes?

Hurrah! Through dextrous economic manoeuvring the Coalition has deftly avoided the dreaded double dip. Just the tonic in this joyous week of national celebration? Right?

Well, the economy is not growing. It has been totally stagnant since the end of September. As the ONS chief economist has just told me, the 0.5% growth number announced today for the first quarter, would be zero, were it not for the snow. If you take away the snow, you have an economy on a perfectly flat plateau.

0.5% is merely the arithmetic bounceback from the temporary snow-based shrinkage in the economy in the final quarter of 2010. A true Lord of Doom could point out that the size of the UK economy is almost certainly very marginally smaller today than it was at the end of September. The numbers for that will be revealed in the second reading on q1 next month. But for any meaningful statistical purpose it is flat.

Keen observers of the Chancellor will however note that as Shadow Chancellor, George Osborne responded to a +0.1% figure for Q4 09 under Brown/Darling in the following manner: “Let’s be clear – this is about as weak growth as you can get”. Despite the brave face put on the numbers this morning, I’m pretty sure they will have disappointed, though not as much as last quarter’s.

What matters in a time of snow-distorted GDP growth figures is a cursory glance at measures of the size of the economy. If you set the size of the UK economy in 2006 at 100, then in Q3 it was 99.6, Q4, 99.1, and Q1, back up to 99.6.

If as the Government and the ONS claimed, the drop to 99.1 was merely a temporary impact caused by the snow, then you would expect it to return to 99.6, giving you “growth” of 0.5%, that is basically arithmetic. Simply put, if the Government uses the snow as an excuse for all of the -0.5% in Q4, it cannot really claim +0.5% as real growth. It is as arithmetically anomalous as  the negative figure in Q4.

On top of that you should also be seeing that snowed-off production from Q4 reappearing too. Basically, it has not, in net terms. There was some in transport and services, but construction for example not just failed to bounce back, but has freefallen further, -4.7% in Q1 versus -2.3% in Q4.

The one shining light here is manufacturing, which was up 1.1% in Q1. Finally the sterling effect may be doing some good, and helping rebalance the economy. The soft numbers also mean that the Bank of England can also hold off on the rate rises for another few months.

But is this economic performance really enough for the Chancellor to be telling the Cabinet that the “economy is on the right track”? Was that really his assessment, after having seen these numbers yesterday? Remember these numbers don’t take into account the very recent consumer surrender, nor the inevitably negative impact of an extra Bank Holiday and half of Britain having a second Christmas. Today it appears like that the UK locomotive is languidly trundling on some slow moving narrow guage rather than the high speed line.

Follow Faisal Islam on Twitter @faisalislam

7 reader comments

  1. Patrick says:

    Aren’t these figures also incredibly disappointing for the Bank of England. It has spent £200 billion on asset purchases and cut rates to 0.5%! But as the Notayesmanseconomics blog points out this is the result.

    “This brings me back to a theme of mine for the UK which is stagflation. How do we define it? No growth since the third quarter of 2010 and an official inflation rate which at 4% is twice its target seems to do the job. The first part of the sentence gives us the stag and the second the flation.

    If we put to one side my view that the UK needs a change of economic policy and look at the consensus view of our Monetary Policy Committee it is apparent that they are in danger of not only failing on my terms but also failing on their own.”

    I think he has a point as the Bank of England appears to have abandoned its inflation target but does not appear to have given us much growth…

  2. Yorkshire Lass says:

    I haven’t been so surprised since I heard that the Pope is Catholic.

  3. Saltaire Sam says:

    The really scary thing is that Osborne and Cameron are clearly never going to admit they have got it wrong and need to adjust, no matter how bad things get.

    They will plough on regardless, blindly led by dogma presumably until Clegg finds the cojones to say enough.

  4. Philip says:

    In an economy accustomed to being consumption-led, it’s bound to take a while for a re-balancing towards investment, manufacturing & exports. Until that happens (if ever!), people losing their jobs, under threat of losing them (notably public sector) or uncertain about their employment future aren’t going to be spending wadges of £££.

    1. Andrew Dundas says:

      Every economy is consumption led. All businesses are sales-led.
      The only reason why economists usually study markets from a production point-of-view is because it’s very difficult to measure consumers’ demands. Hardly any businesses invest because of incentives or cheap loans. What drives investment and jobs is rising demand from customers.
      [Imagine trying to verify exactly how much, say, pensioners or Uni students spend on different products and services: they don’t keep notes unless they’re very poor as I once was.]
      No business survives if it doesn’t produce what its customers want.
      Our problem right now is that consumers are spooked. From fear, they prefer to pay down their debts rather than buy the extras that keep our economy going.
      Fortunately, the last government’s policy of keeping our consumer spending going when the Wall St Crash hit us, coupled with the BoE’s ultra low interest policy has held our economy up.
      UN-fortunately, the biggest of those those props is now being kicked away!

  5. Andrew Dundas says:

    Financial markets already believe that the coalition’s policy is unsustainable.
    Not quite as daft as September 1992 when FX dealers made their fortunes by betting on a devaluation. To devalue what the Tory Chancellor Lamont claimed then was ‘the strongest currency in Europe’. It’s worth remembering all that self-induced economic collapse because David Cameron was right at the heart of it as Lamont’s bag carrier.
    Fortunately, this government inherited the best targeted recovery plan from both the MPC and HM Treasury. Unfortunately, they’ve rubbished those plans and replaced them with an austerity programme that will force down tax revenues and force up benefits for unemployed folk. Both of those unplanned changes will cut into government plans to reduce the deficit.

    It’s time for a change in the government austerity plan. It’s too aggressive and it’s not working.

    1. Kes says:

      Rubbish all the way through!

      We will have a few years yet of poor growth due to the appalling economic management of your mates Brown and Balls. The current actions have a strong resemblance to Darling’s own suggestions which Balls would never have implemented.

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