The latest GDP figures confirm that Britain is limping, not striding, out of recession. The worst UK winter in half a century has been blamed for the disappointing 0.2 per cent increase in economic output in the first three months of 2010.
Yet, ice or no ice, the bigger picture remains the same. This seems set to be a fragile and slow recovery. And the risk of us slipping back into negative growth remains real.
What does this data – the last major official report on the economy that will be delivered before polling day – mean for the election campaign? Gordon Brown is right to argue that it shows the perils in taking demand out of the economy in this financial year, although the difference between his own plans and those of the Conservatives has been greatly exaggerated.
But the macroeconomic picture is not as simple as the Prime Minister argues. The Treasury's forecast for strong growth of 3.25 per cent, starting next year, is looking increasingly over-optimistic. That was the stark message from the International Monetary Fund this week. There is certainly no sign yet of the vigorous private sector recovery that would start to justify the Treasury's projections. Nor, despite an encouraging rise in manufacturing output, is there much reason to be confident that a strong surge in demand for British exports will come to the rescue. What expansion in output there has been in the past half year is a result mainly of domestic fiscal and monetary stimulus.
The implications for the public finances of prolonged weak growth are profound. Growth will take up less of the strain of reducing the deficit than has been budgeted for. This implies that if the budget deficit is to be halved over the next Parliament, a target that all three main parties more or less accept, spending cuts or tax rises will need to be greater than any of them has planned.
This will be painful enough. But there is a further nasty complication. Fiscal and monetary policy – in the form of the Government's demand-sustaining borrowing and the Bank of England's 0.5 per cent interest rates and quantitative easing – have worked in tandem in propping up our economy up until now. But this week's inflation figures surprised on the upside. This will increase pressure on the Bank of England to raise interest rates before the end of the year, which will increase the price of credit throughout the economy. One of those props could be kicked away.
These are the sort of difficult issues the three main party leaders ought to be grappling with in the final televised debate next week. Unfortunately for the electorate, what we are likely to get instead is an extension of the sterile debate about the incoming National Insurance rise and the familiar argument about the timing of cuts.
The politicians are likely to get away with their selective myopia for a while at least. Government borrowing figures this week, though registering a peacetime high of £163.4bn, came in below the Treasury's recent estimate. Nor is there much sign of a bond markets run on gilts, despite the warnings of the Conservatives.
For now, Britain has time to keep its fiscal and stimulus measures in place. And the politicians can engage in their largely irrelevant squabbles without reality rudely intruding. But this window of safety will not be open forever. And with every disappointing growth figure, it closes a little further.Reuse content