Sir Mervyn King, governor of the Bank of England. Photo credit: Downing Street.
UK economic activity shrank by 0.2 percent in the last three months of last year, according to initial figures from the Office of National Statistics. The shrinkage makes grim reading for the Coalition government given gross domestic product (GDP) expanded 0.6 percent in the third quarter of 2011. The quarterly fall in GDP is the first since the last three months of 2010. Two consecutive quarters of declining GDP is widely considered to represent a recession so fears of a double-dip recession surged with the release of the figures.
Chancellor of the Exchequer George Osborne said the figures were disappointing but not a surprise, reported the BBC. “They are not entirely unexpected because of what’s happening in the world and what’s happening in the eurozone crisis,” he said. “The truth is that dealing with those problems is made more difficult by the situation in the eurozone.” Ed Balls MP, Labour’s shadow chancellor, insisted the fall in GDP was linked to the government’s cuts: “The British recovery has been stalling since the government’s spending review in the autumn of 2010, but now the economy has gone into reverse. By clobbering the economy with spending cuts and tax rises that go too far and too fast, the government has left us badly exposed if the eurozone crisis deepens this year.”
On Tuesday, government debt passed through the £1 trillion barrier for the first time – the equivalent of £16,000 for every person in the country.
King: Arduous, long and uneven road to economic recovery. The new figures come a day after Governor of the Bank of England Sir Mervyn King said that the UK economy faced an “arduous, long and uneven” path to recovery but that once it does it will be on a “more sustainable footing than at any point in the past 15 years.” In his first speech of the year, reported The Daily Telegraph, King acknowledged that consumers had seen a “ferocious squeeze” on take-home pay, with the longest-running fall in wages since the 1920s. Despite the many problems, “there is no reason to despair,” reassured King, who reminded that “all crises come to an end, and businesses will find ways to trade with each other and meet the needs of consumers. Helped by the right policy actions, the UK and world economies can and will recover.”
“The tragedy of the financial crisis is that those who have suffered most have been those who bear no responsibility for it,” said Sir Mervyn King. “The legitimacy of a market economy will inevitably be challenged if rewards go disproportionately to a small elite, especially one which benefited from the support of taxpayers. Those taking decisions on remuneration, in the financial sector and elsewhere, need to understand that a market economy rests not just on incentives, but on the acceptance that the distribution of rewards is fair.”
Trillion-pound debt underlines the severity of the problem. In an editorial, The Daily Telegraph insisted that, “there has been a shift in public sentiment about the ways we can tackle Britain’s trillion-pound debt.” The newspaper sighed that, “there is no money left. There is not going to be any money for a very long time. And the public realises it. So while it is eminently possible to argue in favour of a smaller state, or a benefits cap, on their own merits, it is also largely unnecessary – because they can already be justified by supervening fiscal necessity. For instance, it is generally accepted that it is not just nonsensical, but positively indecent, to squander money on welfare claimants when so many taxpayers are struggling with their own domestic finances.” The Telegraph said that the “shift in sentiment has profound political consequences. It suggests that the public is willing to support a tougher line, as long as it is also clear that the Government is doing everything it can to bring about long-term prosperity … If the Coalition can show that it shares the voters’ priorities, it will continue to enjoy their support.”
Double-dipping or not? BBC Economics Editor Stephanie Flanders assessed the numbers and decided the UK economic recovery is “in rehab.” “In two and half years of ‘recovery,’ the UK economy has recovered only 45% of the output lost during the recession”, sighed Flanders, who noted that “if today’s GDP figures are right, we didn’t recover any output at all in the fourth quarter of 2011 – we lost about £750m’s worth (give or take).” Flanders reported that Capital Economics and the Centre for Economics and Business Research now believe the UK to be hurtling towards a double-dip recession but others “are not sure that this is the start of a serious double-dip.” Flanders leaned toward the more optimistic analysis and concluded that there are “tentative signs for hope … there is a growing feeling that the eurozone crisis may have moved into a new phase. It’s still chronic, on this view, but not life-threatening.”
“The situation is worrying, but it is by no means slit your wrists time quite yet,” said Alex Brummer of The Daily Mail.
Not the end of the world. Alex Brummer at The Daily Mail’s Right Minds comment hub reassured that “these GDP figures are not the end of the world,” and reminded that the economy “actually grew by 0.9pc in 2011, half what was expected but at least there was a plus number in front. Clearly the GDP numbers are not good news but the determination of some commentators to denigrate is colossal.” Brummer noted that “while there was gloomy survey data for October and November, the services sector – which constitutes 70pc or so of GDP – did actually perk up in December along with construction. So one might dare say there may some possible momentum behind the first quarter despite traditional January blues.” Brummer said that “the biggest drag on output remains the Eurozone … the American economy is improving, Asia-Pacific is healthy and so it is only the eurozone which is causing problems.” With this in mind, Brummer recommended that the UK needs to redirect its trade in goods and services away from this bloc “as quickly as possible.”
