We were all expecting bad news on growth today – but not this bad. This deeper and longer double-dip recession is a devastating blow to George Osborne’s credibility, but also presents a major challenge to policymakers on all sides. The closer we get to the next election, the more the coalition’s problems become Labour’s too.
The economy hasn’t just shrunk for a third successive quarter, it seems to be going backwards: the 0.7 per cent contraction in Q2 was worse than the previous two quarters, and the worst quarterly performance since early 2009. This suggests that the government’s attempts to kickstart growth are not working.
This isn’t just a technical recession, it’s a proper recession. For the last year or so, ministers have been denying the possibility of a double-dip, then calling it a technical blip. They have tried to explain away poor growth, by blaming bank holidays and bad weather. Today’s numbers show that the problem is much deeper than that – for example, the construction sector shrank by five per cent in Q1 and by another five per cent in Q2.
But it’s the big picture that is most striking. The UK economy has basically been shrinking or been flat for the last four years. The recession that started in early 2008 hasn’t really gone away – despite massive injections of quantitative easing and historically low interest rates. Typically, we would be well into a recovery by now. But this recession is different.
We need to adjust our expectations to a much slower and more prolonged recovery, not a traditional bounce-back – not least because of the uncertainty surrounding the eurozone, and the negative impact that is having on business confidence. Lower inflation is the one silver lining right now, and will help to boost real incomes over the coming months.
No or slow growth means that the deficit will be here for longer and harder to erase. Jeremy Heywood and more recently David Cameron have both now acknowledged that spending cuts will need to continue up to 2020. The next spending review will need to set out further spending cuts from 2015 onwards. But that will be made difficult by the close proximity of the next election. So the next spending review will probably be a scaled-back version, nudging spending plans into 2015-16 and no further.
It will fall to the next government – potentially a Labour government – to set spending plans after that. The closer we get to the next election, the more the coalition’s problems become Labour’s too. That is why Labour should revisit its alternative jobs and growth plan, to ensure that it is responding fully to the scale of the current situation.
Ed Balls’ five-point plan, unveiled last autumn, was an appropriate tactical response at the time. One year on, Labour needs a deeper and wider response – especially if the coalition wobbles continue, and it doesn’t make it to 2015. This should include a clearer plan on infrastructure investment, going further than the government’s announcement last week, and a more aggressive approach to youth unemployment and apprenticeships, as proposed by Andrew Adonis yesterday.
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Dermot Finch is head of public affairs at Fishburn Hedges. He tweets @dermotfinch
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Dermot is right: we need “a clearer plan on infrastructure investment… and a more aggressive approach to youth unemployment and apprenticeships.”
But we must not lose sight of the ever-clearer fact that 88% of our economy is being poisoned by the 12% comprising the global financial markets. The claim that they mitigate risk is false – for the economy as a whole.
Labour’s recovery plan needs to include energetic efforts to regulate globally these out-of-control markets that gobble up banks, regions and governments. Brown and Darling – whatever else people may say – showed that energy at the time of the collapse of the financial markets: they saved the world. It falls to Miliband to work with Obama and Hollande to repeat the trick.
The Tories have increased borrowing and miraculously this has not killed off the economy.
By putting forward sensible plans to build houses and update infrastructure we would be transfering some of this borrowed money into peoples pockets which would create jobs and return money back to the treasury as taxes get paid and benefits claims reduce. Also we need to remind voters that they have been in for 2 years now and when are they going to take responsibility for their decisions?
The Clinton mantra of KISS, keep it simple stupid, will resonate with the voters and push the Tories into making mistakes as they wriggle on a problem of their own making.
Ed Balls’ 5 point plan was not even appropriate when it was launched. I don’t know why it was so short term when he himself clearly identified the depths of the problem, which was insufficient long term demand. Where the response was inadequate is that it concentrated too much on the VAT quick fix, and not enough on skills and training in potential growth sectors. Not did it respond to the scale of infrastructure investment required to have a real impact, nor the need for a National Investment Bank. Not bold enough. It also needed a plan for international reflation, which , to give him credit, Gordon Brown was embarking on.
Hope Ed Balls can now respond with a plan which mirrors his own analysis.