The rise and fall of the GDP elevator

Last month, information published by the Office for National Statistics (ONS) suggested that GDP has risen by 0.5% in the first quarter of 2011. The positive growth was welcomed by many as it means that Britain is not in a double-dip recession, though it fell marginally short of the Office for Budget Responsibility’s prediction of a 0.8% rise.

However, many critics of the present government have argued that, rather than being a sign of growth, this 0.5% rise only cancels out last quarter’s 0.5% fall. The result of this has been a media-wide debate over whether this counts as growth or not, with some commentators, specifically Channel 4 News, referring to the economy somewhat morbidly as ‘flat-lining’. But in separate interviews, George Osborne and Danny Alexander, Chief Secretary to the Treasury, both staunchly rejected such suggestions repeatedly calling the change ‘growth’.

Away from the war of words, though, the economic picture is not a positive one. Stephanie Flanders, the BBC’s economics editor, argued that this level of growth was below expectation this far into a recovery. Breaking down the figures, one sector emerges as the clear loser in this quarter: construction, which experienced a 4.7% reduction in output.

It has been argued then that excluding construction, the economy easily meets its growth target of 0.8% and this is certainly true. However, construction is not an industry that should be tailing in an economic recovery. Construction is, self-evidently, an industry which deals very much in the long term and a boom in construction often leads a recovery, heralding sustainable growth in the economy further down the line (look at China).

The cause for construction’s contraction is not hard to trace though: any economic detectives on the trail need look no further than the government’s spending cuts which axed the majority of new building projects, most notably in education. Ultimately, construction, along with things like population growth, is necessary to create the capacity for growth within an economy, the absence of which could strangle the UK economy before it gets back on its feet.

Ultimately, it is difficult to understand where growth is expected to come from in this recovery. Deloitte, the financial services firm, recently published a report suggesting that disposable incomes in the UK would fall an average of £780 per household this year. They also forecast that, things as they are, household incomes would not return to their 2009 level until 2015 and that, in that time, inflation would continue to rise, peaking at 5%. With unemployment remaining high then, levels of consumption look likely to fall in 2011.

In the Commons last month, David Cameron accused Ed Milliband of being ‘desperate’ for the economy to shrink saying that it was time for him to admit he was wrong about the deficit and about the economy in general. But with last quarter’s fall being blamed on snow and the signs from this quarter’s underperformance uncertain, it is becoming increasingly clear that the UK economy can’t thrive on a diet of mere rhetoric: It is at the point where it needs real results ­ – and soon.


Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.