The Office for National Statistics has confirmed that the UK economy shrank by 0.3% in the final quarter of 2012. Tony Dolphin, IPPR Chief Economist, said: “All the talk is once again of a triple-dip after the GDP figures for the final quarter of 2012 showed the economy contracted by 0.3 percent. If GDP also shrinks in the first quarter of 2013, then the economy will be back in technical recession – the third recession in the space of five years. “However, this still remains speculation. We will not know for sure whether the economy is back in recession for another three months. And even then, history suggests there is always a chance that the GDP figures will be revised and that any recession will be subsequently eradicated from the record. “What we do know, however, is that the economy is facing a triple crisis: stagnation, debt and imbalance.
Stagnation: because real GDP remains over 3 percent below its peak level, five years ago in the first quarter of 2008; and because over the last year GDP has not grown at all. 2012 has been ‘groundhog year’.
Debt: because although household debt has fallen from a peak of 170 percent of income in 2008 to 150 percent, it remains at a very high level relative to UK experience prior to 2000 and compared to debt in other advanced economies.
Imbalance: because the current account deficit in the first three quarters of 2012 was 3.7 percent of GDP – on course to be the largest deficit since 1989; and because manufacturing output is now clearly on a declining trend.
Hopes of an export-led recovery or a ‘march of the makers’ have evaporated.
“The Government’s efforts to reduce its borrowing are becoming self-defeating. George Osborne has already conceded that he will miss his target for reducing public debt and figures released earlier this week showed, public borrowing in the first nine months of the current fiscal year was £106.5 billion, up from £99 billion in the same period of 2011-12. This is putting the country’s AAA credit rating under threat. “As a first step to get back on track, we need a temporary cut in employees’ national insurance contributions, using the historically low cost of borrowing to increase spending on infrastructure, measures to keep the long-term unemployed in touch with the labour market and an active industrial policy focused specifically on reversing the country’s poor export performance.” IPPR’s recently published a report – A path back to growth – argues that more effort is required to boost demand in the short-term and to ensure that the economy’s growth potential is supported in the medium-term.
It says that a path back to growth will require a change in fiscal policy, but on its own this will not be sufficient. This report is available at: http://bit.ly/IPPR9438
In the report, IPPR also argues for reforms to address long-standing weaknesses in the UK economy: underinvestment, vulnerability to external shocks, a poor export performance and persistent inequalities. The report argues that the path back to growth should also be a path to a different kind of British capitalism. IPPR’s report recommends a roadmap for growth with six elements: An increase in the scale of quantitative easing; Fiscal measures to boost growth in the short-term combined with a reaffirmation of the plan to eliminate the deficit in the medium-term; Additional infrastructure spending; Measures to make household debt restructuring easier; Measures to keep the long-term unemployed in touch with the labour market; An active industrial policy. The report says Government ministers have called the business environment favourable and accused companies of whingeing about government policy when they should be investing their cash piles but, from a business perspective, the outlook is decidedly uncertain and this is a major deterrent to making long-term plans and spending money. The report argues that policy needs to be oriented towards reducing uncertainty.