THE EUPHORIA about the Olympics seems to be inversely related to the prospects for the economy. As Team GB’s gold tally rose, so the forecasts for growth were marked down as the bad news piled up. First, the Office for National Statistics reported GDP in the second quarter of this year had fallen by more than expected – 0.7% – the third successive quarter of negative growth. Then, the governor of the Bank of England said he did not know what was going to happen, other than it was not going to be good. And, most recently, the UK recorded its worst ever balance of trade figures which suggested rebalancing of the economy by replacing domestic activity with exports was way off track.
Taking the ONS number for GDP at face value means not only that the UK is well entrenched in a technical recession, but that the economy is now one quarter of a percentage point smaller than when the coalition came to office two years ago. The government’s twin (and inter-dependent) objectives of growth and deficit reduction look to be in tatters. Without growth, the tax receipts come up short, spending is higher, and the deficit deteriorates. But this latest batch of statistics and forecasts beg two key questions: are things really as bleak as the numbers imply and, if so, does it mean that the authorities should change course?
The short answer to both questions is probably no. The numbers themselves are subject to revision, sometimes years later. In an effort to be up-to-date, the statisticians sacrifice accuracy but it is the first set of figures that has the impact. Much of the surprise about the 0.7% decline in GDP was attributable to the usual volatility in construction and the shutdown of the Elgin platform in the North Sea. Take these factors out and the number looks much better.
The GDP figure is also clearly at odds with other numbers, some produced by the ONS itself. In the three months from March to May, employment rose by 181,000 and unemployment fell by 65,000. Most of these extra jobs were outside London (so not Olympics-related) and 73% were full-time. Since the double dip began nine months ago, the economy has created a quarter of a million new jobs, more than in the boom years of 2002, 2003 and 2006, and the rise in the hours worked is greater than in the 1992-2008 period. The PMI surveys also tell a different story. Although they weakened over this period, the responses still pointed to an expansion, rather than contraction of activity. The composite PMI (an aggregate of services and manufacturing) produced an average reading of 54.9 in the first quarter, which eased to 52.1 three months later – both numbers still above the critical 50 mark.
So perhaps the GDP numbers are not telling the whole story, which is a good reason for the government to stick to its guns. The chancellor is right to claim that the eurozone crisis is blocking an escape route from depressed domestic demand but this does not mean the government should fill the gap or consumers should be encouraged to spend money they have not got. That is what caused the problem in the first place. Adding more debt is not an obvious way of reducing debt and it would in any case jeopardise the UK’s highly prized AAA credit rating.
Anyone who thought getting out of the mess would be quick and pain-free underestimated the scale of the problem. But there are signs that the worst is over and activity will pick up. Some of this is attributable to actions taken by the authorities, such as measures to ease lending to businesses, the £375bn of quantitative easing, the government underwriting £40bn of infrastructure projects, and continuing low interest rates. And the new jobs will increase spending power at a time when inflation is falling, an important boost. It is easy to be overwhelmed by the bad news but it means the only way is up, and it is starting about now. ?