There’s no getting away from the fact that the forecast of the Office for National Statistics that the UK economy contracted by 0.5 per cent has dominated the headlines this week. But it would, I think, be premature to immediately conclude that Tory-led government policies will see us hit a ‘double dip’ recession with a further contraction in quarter one of 2011. My concerns are that 2011 will be the year of ‘stagflation’ and, if youth unemployment continues to rocket, the year of a lost generation to rival the victims of the 1980s.

We haven’t seen ‘stagflation’ – where sluggish growth is accompanied by high and rising inflation – for a generation. Yet even the most optimistic economic projections have growth in 2011 at under two per cent, well below the 3.7 per cent inflation rate, which Bank of England Governor Mervyn King expects to increase to between four per cent and five per cent throughout most of 2011.

So what to do? With interest rates at 0.5 per cent they can’t go much lower, but they should certainly be kept at current levels for the foreseeable future. The danger is that the Bank of England’s Monetary Policy Committee will increase rates to one per cent to try to control inflation even though this would probably reduce economic activity even more and cause more pain to consumers in the process?

The truth is that the government has failed miserably on all of its economic targets. Unemployment is rising, there is no economic growth, the deficit is not falling, it has failed to force the bank lending that will stimulate private sector growth just as it has done nothing to curb bank bonuses. It has effectively strait-jacketed itself and the UK economy. But Labour’s message must remain that strong growth in 2011 – remember that we left the Tories an economy that grew by 1.1 per cent and 0.7 per cent in quarters two and three of 2010 – is the priority. Growth must come before rigid control of inflation.

The issue of rising unemployment among 18-24-year-olds is also becoming increasingly prominent. In December the OECD published its ‘Off to a good start? Jobs for Youth’ report, which demonstrated how the aftermath of the financial crisis has hit the young harder than any other demographic group. According to the OECD youth unemployment in the UK was 18.9 per cent. Last week the ONS revealed it had jumped by 32,000 to 951,000, the highest level since current records began in 1992, and is expected to exceed one million in the next few months. Indeed, while the overall unemployment rate remains at eight per cent, the figure for young people is now a shocking 20.3 per cent, another unwelcome record. It’s not likely to fall.

The government stupidly decided to axe Labour’s Future Jobs Fund – which guaranteed a job to any young person out of work for more than a year and would have provided 200,000 jobs. Instead it is pinning its hope on its Work Programme, which will offer young people unemployed for six months or more support to write a CV and practise interview skills. Help writing a CV is all very well, but nothing compared to providing incentives to businesses to train and employ young people and to increasing apprenticeship and trainee schemes.

Labour must also have a viable alternative to tackle the scourge of youth unemployment. David Blanchflower, a former member of the Bank of England’s Monetary Policy Committee, has shown that a person aged between 18 and 24 who is unemployed for over six months takes over 10 years to make up the damage done to their career and life chances.
Adopting policies tailored to allow young people easier access to the job market must be at the heart of Labour’s economic policies.

Labour’s new shadow chancellor Ed Balls was right to demand a rethink by the Tories. It becomes more clear that the diet of medical shock treatment the Tories still believe is necessary will end up killing the patient who was gradually recovering.

This is the right response. The Tories are sticking to their guns that Plan A to reduce the deficit and generate growth will work, despite the fact that the government’s budget deficit in December 2010 was, at £13.5bn, higher than the £12.8bn from a year earlier, and they have squandered the growing economy left to them by Labour. If they won’t deviate, the need for a credible Plan B for 2011 continues to be vital.

Photo: _Teb