BIG: UK economy ‘could be shrinking’ (updated)


10:11 am - July 11th 2011

by Sunny Hundal    


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Post updated in its entirety

Over the weekend, while the NotW scandal was in full swing, important news went under the radar.

The Sunday Times reported:

Britain’s economy has shrunk over the past three months, according to City experts, piling more pressure on ministers as they drive through the coalition’s programme of cuts.

Economists believe that official GDP figures later this month will reveal that the economy contracted by 0.2% between April and June, after recording growth of 0.5% in the first quarter of the year.

Official measures of GDP published by the Office for National Statistics have consistently proved even gloomier than City predictions in recent quarters.

The experts’ forecasts will revive fears that Britain will re-enter recession, which is defined as two consecutive quarters of negative growth.

George Osborne, the chancellor, may try to blame the Japanese earthquake, a late Easter and the royal wedding break. Critics will say the chancellor also blamed temporary factors for weak growth in the final quarter of last year, when unseasonal snowfall was cited.

Yes – Osborne will try and blame temporary factors again but this excuse cannot be rolled out on a constant basis.

A similar report is also in the Sun today .

So what happened to Osborne’s growth plan huh?

The Guardian reports today that prospects for Britain’s economy remain bleak as “consumers continue to cut back on their spending and export sales fail to take up the slack”.

Keep in mind that right-wingers were touting exports as our way out of the slump only a few months back. The idea this was going to happen was always a fantasy but it nevertheless became a serious talking-point on the right.

The Guardian also says a report from accountants BDO shows business confidence in the manufacturing sector has dropped to a two-year low.

On top of declining demand at home, as the coalition’s tax rises and spending cuts take hold, firms are facing a slowdown in exports, especially to the eurozone, as it struggles with its sovereign debt crisis.

Osorne’s plan to cut spending and make consumers even more fearful of future prospects really worked didn’t it?

I wonder how long it will take tories to admit we should have taken measures to hold domestic demand and confidence.

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About the author
Sunny Hundal is editor of LC. Also: on Twitter, at Pickled Politics and Guardian CIF.
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Reader comments


Expectations management?

0.1% or 0.2% growth would look good and demonstrate the Government’s plans were working if people were expecting negative growth

2. Charles Wheeler

“I wonder how long it will take tories to admit we should have aken measures to hold domestic demand and confidence.”

Don’t hold your breath.

This cant be because George Osborne is a respectable, educated and more than qualified to be Chancellor of the Exchequer.

Remember last year that George Osborne and David Cameron had all the answers and knew exactly what was needed to sort the United Kingdoms Finances out.

Dont tell me that was all more complete and utter Bullshit.

For some reason Tories seem to think the economy is their strongest suit.

Tories seem to think shouting “Labour’s mess!” in every sentence makes for a coherent defence of their failing plans which are now obviously wrecking the UK economy.

I thought Paul Krugman had an outstanding headline on his blog last week:

Contraction, Still Contractionary

http://krugman.blogs.nytimes.com/2011/07/07/contraction-still-contractionary/

Well, quite.

The Tories have messed up on the economy, again and again. The current Osborne crew are bad, however, even by Tory standards.

Yet they know the importance of the economy – in terms of electoral success – so they talk their arguments up and seek to talk down any contrary view … while throwing as much criticism at Labour as they can, hoping it will stick.

Never trust the Tories on the economy!

Presumably the alternative is to not reduce spending by as much as the Conservatives would by borrowing more.

I am not an economist but intuitively it seems wrong to borrow more when we already have a large deficit and large national debt.

My (possibly simplistic) reasoning is that we have borrowed in the past which has enabled us to have a better lifestyle and now we need to pay for that by cutting expenditure, reducing our lifestyles. It seems wrong to borrow more now so we can enjoy goods and services which will be paid for by future generations of taxpayers.

I have previously asked for some analysis that shows that in the long run the increased growth offsets the higher debt but no one has responded, despite a promise by some bloke called Richard.

It is logical to assume that increased GDP will result in increased taxes. It is also logical to assume that borrowing to increase Government expenditure will increase GDP, though perhaps people buying gilts may reduce GDP as otherwise they would have spent this elsewhere?

So if borrowing to spend is so great why not simply keep on borrowing to increase GDP and we will all be much better off? Firstly there is a limit to how much people will lend to the Government and secondly this debt does eventually have to be repaid which surely will reduce growth when repayments eventually begin?

I found the following paper on the web:

http://www.economics.harvard.edu/files/faculty/51_Growth_in_Time_Debt.pdf

This suggests that historically debt can grow to 90% of GDP before it has an impact on growth. After 90% the median growth rate falls by 1%. This indicates that it is counterproductive to promote growth if this allows Governemnt debt to reach 90% of GDP.

The link below shows that debt is forecast to reach around 85% of GDP in 2012/13 under the proposed austerity measures. This does not leave a lot of room for manoevre.

http://www.economicshelp.org/blog/uk-economy/uk-national-debt/

7. Leon Wolfson

Fungus – It’s not that simple. It also matters, a lot, where the debt is owed, and over what period. The majority of the UK debt is owed internally, and over long periods.

The Tories are going to end up, because their economic projections depended on growth, having to borrow more rather than less. If the economy is stagnant, and inflation high – as they are at present – then the effect of cuts are also magnified.

Even if borrowing did take 1% off growth, it would take, say, 1% off 3% growth…which leaves 2% more than the present situation!

There’s also the minor fact that not all taxes and cuts are equal – the VAT rise has had a massively negative effect on consumer confidence, and is massively regressive, and many of the poorly-planned public service “cuts” will end up costing money elsewhere in the system.

@7

Agree the UK has done well to have relatively long dated debt which gives us more breathing space.

As per the link I posted on the other thread the FT have shown how the austerity measures are not responsible for low growth.

How would you increase GDP and how much would this increase our national debt? Would the increased GDP offset the increased debt?

Here is an article on how effective the US stimulus package has been:

http://www.marketoracle.co.uk/Article29162.html

” ‘[E]ven if you buy the White House’s argument that the $800 billion package created 3 million jobs, that works out to $266,000 per job. Taxing or borrowing $266,000 from the private sector to create a single job is simply not a cost effective way of putting America back to work. The long-term debt burden of that $266,000 swamps any benefit that the single job created might provide.’


Reactions: Twitter, blogs
  1. Liberal Conspiracy

    BIG: UK economy could be shrinking say experts http://bit.ly/qdhwsy

  2. Mabel Horrocks

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  3. temaris

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  4. RimskyK

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  5. sunny hundal

    BIG: UK economy could be shrinking say experts http://bit.ly/qdhwsy

  6. Jonn Elledge

    BIG: UK economy could be shrinking say experts http://bit.ly/qdhwsy

  7. dm

    BIG: UK economy could be shrinking say experts http://bit.ly/qdhwsy

  8. Steffan Alun

    Ooh, look, George Osborne damaged the economy again. http://bit.ly/nZmJek Not that anyone outside of Twitter are talking about it.

  9. Darren Johnson

    Meanwhile, the economy may have shrunk for last three months. Government cuts to blame http://bit.ly/oJn3Jc

  10. Andy S

    Meanwhile, the economy may have shrunk for last three months. Government cuts to blame http://bit.ly/oJn3Jc

  11. tracy ewan

    BIG: UK economy could be shrinking say experts http://bit.ly/qdhwsy

  12. False Economy

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  13. soisthesun

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  14. Brummie Protestor

    RT @FalseEcon RT @libcon BIG: UK economy could be shrinking say experts http://t.co/Oq4mnk3

  15. Larry

    RT @FalseEcon RT @libcon BIG: UK economy could be shrinking say experts http://t.co/Oq4mnk3

  16. Owen Blacker

    BIG: UK economy could be shrinking say experts http://bit.ly/qdhwsy

  17. Martin McGrath

    Remember the economy? Predictions it shrunk 0.2% this quarter confirm Osborne on way to double-dip http://bit.ly/pS3fJK Nice one Georgie!

  18. Time to start worrying? Recession fears go mainstream | Liberal Conspiracy

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  19. The Moor

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