Outlook: I may have spoken too soon earlier this week when I dismissed the IMF's forecast of a 4.1 per cent contraction in the UK economy this year as too pessimistic. Figures released yesterday show that the UK economy shrank a stomach-churning 1.9 per cent in the first quarter of this year, putting the current recession on track to be the worst peak-to-trough economic contraction since the Second World War.
The record to date is held by the recession of the early 1980s, when from peak to trough the economy shrank by 5.9 per cent. This one is already at more than 4 per cent, with little sign of a let-up. The Government was at pains to insist yesterday that a 1.9 per cent shrinkage for the first quarter was within its own range of expectations and therefore didn't undermine the Budget forecast of a 3.5 per cent decline for the year as a whole.
Really? That's not what the Chancellor said on Budget day, when he anticipated that the quarterly decline would be "similar" to that of the 1.6 per cent shrinkage recorded for the final quarter of last year. In any case, with just three months under our belts, the UK economy is already more than half way to the Government's forecast for the year as a whole. If the Treasury's predictions turn out to be wrong, the Chancellor will have to borrow even more than the £175bn he's got pencilled in for this year.
Small wonder that the gilts market has taken a further lurch downwards. The idea that the UK might lose its triple-A credit rating isn't quite as fanciful as ministers like to pretend. In a note issued this week, Moody's warned in barbed tones that should whoever is in power after the next general election not take steps to bring the structural deficit into balance more quickly than envisaged in the Budget, then it may have implications for the rating.
Moody's is also assuming that the UK economic model isn't lastingly dented, in the sense that flexibility in the economy will allow growth in other sectors to compensate for the loss of dynamism in financial services and the housing market. That's quite an assumption.
It's still not impossible the Treasury will be proved right on growth for this year, and, in any case, given the already calamitous state of the public finances, the difference between the Chancellor's 3.5 per cent and the IMF's 4.1 per cent scarcely seems to matter.
The reason why the Chancellor may be right in thinking the economy will be recovering by the end of this year is that much of the contraction which has taken place so far is down to destocking. Once the inventory adjustment stops, that in itself will cause the contraction to slow or even reverse. On the other hand, more than a million people are expected to be added to the ranks of the unemployed over the next year, which will have a powerfully negative effect on consumer demand.
If the outlook for the UK economy looks bad, the Government can at least take heart from the fact that it appears to be equally poor almost everywhere else in the advanced world. The size of economic contraction in Germany over the next two years is expected to be even bigger than Britain's. The same goes for Japan.
What makes Britain different is the scale and speed of the deterioration in the public finances. The relative size of the structural deficit in Britain over the next five years is expected to be much higher than almost anywhere else. In getting itself into this predicament, the Government mistook the windfall of buoyant tax revenues from the City and the housing market as a permanent increase in the country's tax base. Now these revenues have gone, the Government finds it cannot afford the public spending it has signed up for.
Yet even on this front, the situation isn't quite as bad as it is sometimes painted. The scale of the deterioration is alarming, but a comparatively low level of public debt initially means that the UK can borrow an awful lot more before it becomes an outlier among similarly triple A-rated countries.
Even at its forecast peak of 80 per cent of national income, UK public debt would still be beneath the average for advanced economies as a whole. All the same, it's going to be touch and go, and, as Moody's implies, the period of fiscal consolidation – that's austerity to you and me – that awaits after the next election is going to be a good deal more severe than outlined in the Budget.