Right on schedule but very much at the wrong moment for the Conservative election campaign, the Office for National Statistics released its preliminary report on the economy for the first three months of 2015. The savvy reader will recall that the prime minister and the chancellor have for some months bragged of the robust recovery of the UK economy, even trumpeting it as the fastest among almost any set of countries you might put together.
Quite unwelcome both in Downing Street and Conservative Campaign Headquarters is the news that the UK’s GDP increased by just 0.3% in the last quarter of 2014 to the first quarter of 2015, well below expectations and half the rate for the previous quarterly increase.
The reaction to this marginally dismal performance followed predictable lines. For the shadow chancellor Ed Balls the weak growth demonstrated that the Tories “have not fixed the economy for working families” (non-working families seem to be under his radar). The head of the Confederation of British Industry took quite a different view, sanguinely reporting that “feedback” from CBI members indicated to him that the economy was “more resilient” than the 0.3% suggests.
Wobble or downturn?
So is this drop from 0.6% to 0.3% cause for serious concern or a mere “wobble”, as suggested by the chief economist of PricewaterhouseCoopers? Is Balls jumping on a random variation for political gain, or correctly identifying the failure of the Coalition’s economic policies (also for political gain)?
Inspection of the chart below helps to answer the “wobble-or-downturn” question.
The data bars show growth rates measured quarter-on-quarter, while the dashed line reports the growth rate for each quarter compared to the same quarter a year before (the “annualised quarterly growth rate”). The latter measure is the more effective in avoiding bias due to seasonal variations (for example, note that for every year the lowest quarterly growth rate occurs in the 4th quarter).
The annualised rate demonstrates that the economy was in a downturn for the first two-and-one-half years of the coalition government, hitting its lowest point in the last quarter of 2012. This long slowdown in growth rates promoted the Office for National Statistics to assess this period as the slowest recovery on record, something that is frequently repeated by Labour supporters, such as Frances O'Grady of the TUC.
The two vertical lines in the chart highlight that the economy has experienced more than a “wobble”. The annualised growth rate displays a pronounced cyclical pattern, peaking at just over 3% in the 2nd quarter of last year. Then it levelled off for two quarters followed by a substantial fall in 2015Q1.
This cyclical pattern is consistent with what a group of economists, including myself, have been predicting over the past year. With the economy in decline in 2012, Osborne moderated his spending cuts, which at long last turned decline into modest recovery, as illustrated by Ann Pettifor.
However, the impact of that one-off policy shift would at some point exhaust itself, bring recovery to an end until someone initiates fresh fiscal stimulus. Despite Ed Balls’s criticism of the Coalition’s economic management, he denies that he is a candidate to implement a fiscal shot-in-the-arm.
This less than encouraging news from the ONS reinforces gathering doubts about the health of the economy. Just before the GDP news broke the New Policy Institute released a report warning of a gathering storm of imbalances in the UK economy. The report lists five areas for concern, including a deteriorating trade balance link to stagnant productivity, and stagnation household incomes that results in accumulating debt to maintain living standards.
Having it both ways
Had the ONS come in with a report of a substantial increase in GDP growth for the first quarter of this year, we can be confident that the prime minister and the chancellor would have used the news to argue that people should vote Conservative.
Less expected is that they use this evidence of economic failure also as an argument to vote Tory. David Cameron tells us: “Our economy is growing; growing at a rate that many other European countries frankly would give their eye teeth for.” This is rather like saying in the land of the blind the one eyed man is king.
Perhaps sensing the weakness of the European comparison, the prime minister argued that because the economy is weak, the necessity to keep it in sound Tory hands is all the greater.
Reflect on that argument a moment. Coalition policies have been associated with the slowest recovery on record, and it appears that the recovery is now faltering. And yet, it’s given as a reason to vote Tory. You have to admire that kind of chutzpah.