Hopes remain for bounce-back despite GDP fall
Wednesday 25 July 2012
When Bank of England governor Sir Mervyn King gazed into his crystal ball earlier this year he predicted that the economy would “zig-zag” in and out of growth throughout 2012 - but so far the recovery has headed in one direction.
The UK is now in the grip of the longest double-dip recession since the 1950s as the age of austerity, tight lending conditions and record rainfall formed a toxic cocktail for growth.
But Sir Mervyn may still be right to a certain extent.
The decline in GDP between April and June was at least in part down to one-off factors, or as the ONS dubs them "special events".
Statisticians have not been able to put a number on the impact of the additional bank holiday granted for the Queen's Diamond Jubilee - but have admitted it will be a "significant" hit.
And then there was the Great British summer. Torrential downpours throughout April and June dampened demand for clothing, food and leisure activities, while the nation's builders struggled to get out to work.
This was underlined in the construction sector figures, which showed a mammoth 5.2% decline as the dismal weather stifled projects.
Chris Williamson, economist at financial information services firm Markit, said: "Some of the overall decline - perhaps as much as 0.5% - can be attributed to the additional public holiday for the Queen's Jubilee, while wet and cold weather also hit high street sales and other outdoor-related services activity, which suggest the weakness may only be temporary."
But regardless of the "special events" - analysts, and even the Chancellor, have warned that the underlying picture is difficult.
In reaction to the most recent growth figures, George Osborne said the "country has deep-rooted economic problems" and did not offer the weather or Jubilee as an excuse.
Many have rounded on the Chancellor, blaming his deficit-busting plans for choking off the recovery.
TUC general secretary Brendan Barber said: "The Government's austerity strategy is failing so spectacularly that it has wiped out the recovery completely."
The impact of the fiscal squeeze can be seen clearly in the construction sector figures for May - in which public housing work plunged 23% and new infrastructure projects slumped 21%.
Howard Archer, chief UK and European economist at IHS Global Insight, said the economy's weakness clearly "runs far deeper" than the one-off factors flagged by the ONS.
Sir Mervyn's "zag" should eventually come in the third quarter of the year as the economy plays catch-up following the loss of activity around the Jubilee at the start of June. Economists have forecast growth of up to 0.6% for the July to September period.
A bounceback will also be aided in part by the Olympics as legions of tourists splash out on souvenirs, hotels and restaurants, while shop footfall surges.
But what about beyond the third quarter?
Well, the Chancellor and Bank governor have put in place some emergency support measures to get the economy moving again, while the Government has also announced new infrastructure investment, such as £9 billion in rail, which may boost growth.
The £80 billion Funding for Lending Scheme, a joint move by the Treasury and Bank to unclog credit flow, should feed through businesses and households.
Meanwhile, the Bank continues to fire up the printing presses - injecting a further £50 billion into its quantitative easing programme earlier this month.
But even with the extra measures, the Chancellor's tough spending cuts and tax reforms will continue to hit households and place strain on the economy, and with the crisis deepening in the eurozone, the recovery may continue to zig-zag for some time to come.
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