Relief as 0.3% GDP growth shows economy flat-lining not shrinking. Has the Coalition’s mid-term slump bottomed out?

Reading too much into quarterly GDP figures is, of course, a mug’s game. They’re noticed mainly by avid Westminster-watchers and frequently revised both up and down.

None of that means they don’t matter, though. They frame the way politics is reported in the here and now. And that can affect what happens in the future. They can create momentum, or they can stop it dead.

A triple-dip recession, against market expectations of a modest 0.1% increase in GDP, would’ve been a severe blow to the Coalition’s message that, surely but slowly, the medicine’s working. As it is, the actual 0.3% increase in the first quarter of 2013 is sufficient to allow the Government to let out a deep sigh of relief:

Look at the stats and you’ll see the news really isn’t anything to celebrate. Yes, the economy has stopped contracting. But it hasn’t really started growing. Consider these four facts:

  1. output is just about back to the level of where it was 6 months ago;
  2. the deficit is stubbornly stuck at £120bn, the level it was at last year and is expect to be at next year;
  3. the unemployment rate is expected to stay broadly static at 7.9%; and
  4. average earnings increases are currently well behind inflation.

However, however, however… Elections aren’t — to the frustration of economists and, at the moment, opposition politicians — just decided by economics. Elections are also decided by people’s perceptions, in particular their perceptions of whether the current government is mostly responsible for the mess and whether it’s mostly doing the right thing to get us out of that mess.

And as it stands, Labour is still blamed more than the Coalition for the economic mess we’re in; and people broadly accept the Coalition view that public spending cuts now are necessary for the long-term good of the economy.

Labour has another problem, one it can do nothing about. There is no control group to compare the Coalition’s approach to the economy with Labour’s over the lifetime of this parliament. This means that even modest, sluggish, barely perceptible growth by the time of the next election will be claimed by the Government as success. And however much Labour will claim that growth has been lower than it would have been under them there will be no evidence to back it up.

The Coalition will hope that the year March 2012 to March 2013 was its nadir, its mid-term slump, and that it has now bottomed out. The economy may be anaemic, but its heart is still beating fantly. By 2015 the electorate may even be able to feel its pulse.

First-term governments are often cut some slack by the electorate (in the same way Tony Blair’s inability to turn round public services in his first four years was judged sympathetically). The simple fact is that if the economy is growing Labour will find the 2015 general election tough, tough going.

* Stephen Tall is Co-Editor of Liberal Democrat Voice, and editor of the 2013 publication, The Coalition and Beyond: Liberal Reforms for the Decade Ahead. He is also a Research Associate for the liberal think-tank CentreForum and writes at his own site, The Collected Stephen Tall.

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9 Comments

  • @ Stephen Tall

    I think point 3. should read “…broadly static at 7.9%”

    Although better than anticipated by some, I remain cautious as when presenting the figures, in answer to a question about continued growth, the NAO spokesman did say that within the margin of error, there could be a 0.1 / 0.2% variance either way when further adjustments are made in the next couple of months.

  • According to Comres only half of Labour “supporters” trust them on The Economy, that & a divided Party are Labours weak points.

  • Stephen,

    “Elections are also decided by people’s perceptions.” An important point. There needs to be a feelgood factor or at least optimism that things will turn around in the near future as we approach the next elections.

    As you note “There is no control group to compare the Coalition’s approach to the economy with Labour’s over the lifetime of this parliament.” This is equally true of the Libdem recommended approach to the economy in the run-up to the 2010 elections. Alistair Darlings spending plans for this parliament were almost identical to what has been actually been delivered over the past few years – save perhaps for the significant increase in VAT.

    I have no doubt that had the electoral math left us in a coalition with Labour we would now be enthusiastically arguing the case for reinstatement of capital spending/additional stimulus to offest the continung drag from slack trade with the Eurozone on the basis of Vince Cables well-reasoned arguments in his recent New Stateman easay.

    We still need to find a way to position ourselves over the next two years in such a way that we can effectively communicate our core principles and beliefs, ,notwithstanding thecompromises, responsibilities and restraints that come with coalition and collective responsibilty.

  • The sun must be shining, I smell optimism!

  • Two points: if you take away the collapse in oil and the contracting finance sector, the economy has been expanding fairly steadily over the past couple of years. Furthermore, if you take away the damage to exports from the Eurozone crisis, the picture would have been even better. All this is no consolation, but despite a whole host of outside and one-off factors, the rest of the economy is growing.

    However, the crucial thing is that it is not growing enough to lift workers’ confidence to ask for a pay rise above inflation. Till that happens, living standards are not going to rise and it will be a fairly close run matter as to whether this starts sufficiently soon this side of the election for anyone to notice it.

  • It is time we returned to our pre-1850 mentality and realised we are a trading nation: to survive we must produce the goods and services others wish to buy. We should stop lecturing other countries and only become involved if we are asked and have good understanding of all the conditions.

    We need to trade with anyone who will buy our goods and services . Any spending on infrastructure needs to be carefully analysed; will it increase exports or reduce costs. The future of the Eurozone looks poor for the next 5 years but the good news there are plenty of countries growing outside of it. After all, when Britons turned up in Mughal India in the 17 Century we were poor but adventurous.

  • Michael Parsons 26th Apr '13 - 11:52pm

    Mike
    Pre- 1850 Britain industrialised and expanded under a regime of State control, monopoly creation (East India company state monopoly in India was not “poor but adventurous”‘) and frequent armed intervention. We had a policy that no significant n umber of workers should depend on imported supplies that we did not control, and forbad the importation of cotton in the 1720’s for that reason; which we allowed once we controlled South Seas cotton- producing areas. We forbad the production of charcoal for smelting iron in order to preserve oak trees, which led to the development of coal coking as a new industry and industrialisation after 1750 and so on. Similarly Germany and France (and US) industrialised behind protective trade barriers in the 19th century.
    Come Free Trade after 1870 with the reduction of the “natural protection” from high transport costs and we entered a period of decline which sent us ill-equipped into the 1914 war and reduced us to near-starvation.
    Recognise we are a trading nation and protect and develop our trade accordingly, not the opposite!

  • David Pollard 27th Apr '13 - 9:49pm

    I agree with RC. If you look at the graph of growth since 2010 it is + and – but the pluses are slightly bigger than the minuses. If the government runs a deficit of £120bn/a it would be a surprise if the economy was not expanding a bit. Inflation and particularly the price of oil is the main problem which is why we must continue the move to renewables and electric/hydrogen powered vehicles. Also, what is forgotten is that every year which passes, around 4% of those people paying a mortgage, finish doing so and release funds which can be spent elsewhere.
    One naive solution for me would be for the BOE to do some quantative easing by giving money to local authorites to fill in potholes, maintain schools and build some social housing.

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