Technically speaking, the UK economy returned to recession in the first quarter of 2012, according to data released Wednesday morning by the Office for National Statistics. It shrank by 0.2 per cent, following a fall of 0.3 per cent in the previous quarter, thereby qualifying as a recession under the two-quarter rule of thumb used by many economists. Over the year-to-date as a whole, the economy was flat.
These figures are worse political than economic news. The Labour opposition will seize upon them as showing that the government’s austerity programme is too strict and is killing off growth. They will renew their calls for a fiscal loosening through a cut in VAT and a slowing of welfare reform. The governing coalition may also suffer new strains as the Liberal Democrats seek to position themselves as more caring and in touch with ordinary voters than their Conservative colleagues. While Britain is unlikely to face the political ruptures that have been provoked by austerity budgets in Spain, France and most recently the Netherlands, a weakening of coalition support and cohesion is likely over the next few months.
On the economic front, the gross domestic figures are hardly a shock although they do show a disappointing 0.1 per cent growth across the large service sector and an equally small decline in manufacturing. There are statistical reasons to be sanguine about such small deviations above or below zero when the largest negative contribution to the figures comes from the volatile construction sector. There will be further disturbances in the coming quarters’ GDP figures because of distortions introduced by the Jubilee celebrations and the Olympics. Politically sheltered policy makers at the Bank of England are unlikely to be swayed by such ups and downs unless a more sustained trend develops.
During a period of substantial deleveraging by both banks and households, growth is bound to be weak and quarterly figures choppy. The bigger picture is that deficit reduction is on track (partly due to higher than expected tax receipts), unemployment has started to fall and the latest retail sales figures suggest consumers are spending again. Provided the recessionary rhetoric at home and the dark clouds over the Eurozone do not choke off the confidence that is beginning to return to Britain’s high streets and board rooms, this should be one of the shortest recessions on record.