Optimists have been citing all sorts of trends to back up the idea that Britain is on the verge of a strong economic recovery, from a stock market bull run to profits made by large investment banks. Even a couple of months of stabilising house prices have been held up as a "green shoot". Yesterday's GDP figures from the Office for National Statistics blew that froth away and revealed an altogether less palatable economic brew beneath.
The economy contracted by 0.4 per cent in the three months to September. This means that Britain has now endured six successive quarters of negative growth, making this the longest recession since quarterly figures were first compiled in the 1950s. These latest figures are not based on complete data and might be revised upwards. But even if they are, we are unlikely to see a positive figure.
In any case, a few tenths of a percentage point on either side of a growth line are not important. Even if there had been a modest expansion in the third quarter, it would not have significantly changed the broader picture. The prospects for the 2.47 million unemployed in Britain or the millions more who have seen their incomes slashed in recent months would be just as bleak.
What these figures illustrate is just how fragile our economy remains. Output from manufacturing, construction and services is still well below trend. The economy is no longer contracting at the terrifying rate of earlier this year. But there has been no strong rebound to growth. And there is little prospect of one either. The British economy has contracted by about 6 per cent since the middle of last year. Getting back to the levels of employment and output to which we have grown accustomed will be a long and arduous journey.
The political implications of these latest figures are significant. The Chancellor, Alistair Darling, claimed not to be surprised by the figures yesterday. But both he and the Prime Minister, Gordon Brown, have staked their party's fortunes on the emergence of clear signs of recovery by the election next year. There is likely to be some growth by then; whether it will be as encouraging as Labour hopes is doubtful.
Yet these GDP figures are not especially good news for the Conservatives either. David Cameron and George Osborne have spent recent months calling for drastic action to reduce the budget deficit, which they identified at their party conference this month as the "clear and present danger to the British economy". The deep economic weakness revealed in these latest figures makes such priorities look misplaced. The Conservatives plainly did not anticipate the slump being this severe, casting doubt on the Opposition's economic credibility.
Of course, the Conservatives were not alone in misreading the nature of this crisis. It should now be clear that this is not a "normal" recession; the sort induced by governments as they raise interest rates in an attempt to crush inflation. Rather, it is a result of a banking meltdown. Downturns after such credit crises tend to be more painful and much more prolonged. That explains why Britain – which has relied heavily on credit to finance growth – is suffering particularly acutely.
Those were the mistakes of the past. But the imperative of the present is to avoid new ones that could make our economic predicament worse. There would appear to be limited room for more fiscal action given the size of the deficit. But should VAT revert to 17.5 per cent as it is scheduled to next year? This does not seem to be a sensible time to impose an increase in a sales tax. The "scrappage" scheme is a more marginal case. The evidence suggests that it is mainly helping manufacturers abroad, rather than in the UK, but it might well be supporting confidence.
Whatever he decides to do in next month's pre-Budget report, Mr Darling should proceed with caution. The reality is that monetary policy is likely to continue to take most of the strain in ending this recession. Another dose of quantitative easing from the Bank of England has been suggested. But it is unclear how well the existing programme has worked. The primary effect of the £175bn of gilt purchases appears to have been to inflate demand for equities and corporate bonds. This has its uses, not least in allowing large firms to raise money.
But the latest report from the Bank of England shows that viable small and medium-sized firms are still not receiving the working capital they need from the banks. Make no mistake, the credit crunch is still going on. To maximise the effects of monetary stimulus, the Government needs to ensure that the banks are providing the economy with the money it needs to grow.
It is inevitably depressing that all the extraordinary measures that the authorities have deployed in the face of this recession have not yet succeeded in bringing it to an end. But the overriding message from these latest disappointing figures is that this is no time to sound the retreat.