Outlook The Chancellor's current plan is to deliver one final Budget statement before the general election. He may want to reconsider: having to downgrade your already lacklustre projections on economic growth would be embarrassing at the best of times, let alone a few weeks before going to the polls. Yet, on the basis of yesterday's fourth-quarter GDP figure, that is what Alistair Darling may now have to do.
"Next year, I forecast growth of between 1 and 1.5 per cent," Mr Darling told us in the pre-Budget report back in December. A little over a month later, that forecast already looks optimistic.
The fourth-quarter GDP numbers offer little reason to think Britain is now moving on from the recession. Even if that 0.1 per cent growth figure is revised upwards, it is clear that the best-performing part of the economy has been distributive trades – particularly the retail and motor industries. Both those sectors have been boosted by taxpayer-funded incentives. But cut-price VAT has already expired and the scrappage scheme is due to end shortly.
It's possible that other areas of the economy are beginning to step up to the plate. You saw, for example, the business services and finance sector bounce back strongly in the last quarter, while production was also better. Less good, construction, transport and distributive services all performed worse in the fourth quarter than in the previous three-month period. That's hardly conducive to a sustained recovery.
Bear in mind too that the Chancellor could not have expected the bad weather that has hit so much of Britain this month when he made his forecasts. In more normal times, a cold snap would register only as a tiny blip for the economy, but with growth having been so anaemic at the end of last year, the big freeze may have been enough to tip the country back into recession. At best, it will have shaved a little slice off growth, making it even tougher for Mr Darling to hit his forecasts.
The latest economic data will also give the Bank of England's Monetary Policy Committee pause for thought at its next meeting. The MPC had been widely tipped to suspend quantitative easing in February, and with inflation now rising more quickly than expected, there had also been some talk of earlier-than-expected interest rate increases. But now, those rate rises look likely to be delayed and the chances of QE being extended seem higher.
Certainly, the pound fell sharply on yesterday's news, reflecting currency markets' dampened expectations of interest rate increases. Gilt prices slipped back too amid renewed anxiety about Britain's high debt and the potential for further falls in sterling. It is not just that the markets are concerned weaker economic growth will make it even more difficult for Mr Darling to hit his GDP targets – and thus that borrowing may be even higher than expected, though this is certainly the case. The other fear is that once debt goes past a certain point, the economy can go into a vicious circle.
Bill Gross, who runs Pimco, the world's largest investor in bonds, now puts the UK right in the middle of what he describes as a "ring of fire". The ring ensnares countries where Mr Gross thinks there is potential for national debt to rise above 90 per cent of GDP over the next few years (the UK is currently at around 70-75 per cent). Above that level, says Mr Gross, GDP growth is automatically slowed by 1 per cent or more, simply because of the drag from the debt.
None of this makes happy reading for the Chancellor but his shadow George Osborne, too, ought to be very worried. If the Conservatives win the election, he now looks set to inherit an even sicklier economy than previously anticipated. Mr Osborne's first Budget looks exceptionally challenging – particularly on the issue of the speed at which he will be able to cut the deficit.
The Tories no longer disagree with the idea that the Government can raise spending to stimulate the economy during tough times, but Mr Osborne's instinct is to step back from that policy more quickly than those currently in charge at the Treasury would countenance. He may have to be more patient if this anaemic recovery turns into a double-dip recession.
Little to celebrate then, in yesterday's numbers, for politicians, or for the rest of us. The best that can be said is that 0.1 per cent of growth is a positive number. We can take some comfort from the end of recession and we should reflect on how much worse the downturn would have been without an unprecedented co-ordinated response from developed economies.Reuse content