Economy shrinks in last quarter and wages fall
Economists warned of a double-dip recession last night as ministers responded to “shockingly bad” statistics by insisting that there was no Plan B to the Government’s cuts.
After figures revealed that the economy shrank at the end of last year, Mervyn King compounded the gloom with a warning that workers were in the midst of the sharpest fall in their real wages since the 1920s. The Governor of the Bank of England said that inflation could rise as high as 5 per cent in the next few months and that people would feel a “squeeze in living standards” throughout the year.
"George Osborne and the Treasury must urgently rethink their reckless plan to cut the deficit too far and too fast and start putting growth and jobs first"
George Osborne, the Chancellor, said that the December snow was chiefly to blame for the surprise 0.5 per cent fall in GDP in the last three months of 2010. The City had been expecting a rise of up to 0.7 per cent.
Ministers were busy blaming the bad weather – but the figures showed that even without the snow, the recovery which started strong with Labour has ground to a halt. These figures come before we see the impact of George Osborne’s VAT rise which will cost the average family hundreds of pounds
The figures shocked the Square Mile. John Hawksworth, chief economist at PwC, called them shockingly bad but expected some rebound in the coming months. “It certainly adds to the risk of a double dip given the coming squeeze on the consumer from higher taxes and prices and reduced welfare benefits.”
The pressures on consumers’ spending power over the next few months include:
the full effect of the increase in VAT to 20 per cent and rising petrol prices;
a 1 per cent increase in national insurance for all employees from April;
a blow to savers as interest rates are likely to remain low.
The Government inherited an economy with strong growth of 1.1% and with unemployment falling and inflation low thanks to decisions we took. As a result last year’s deficit came in £20 billion lower than expected. But instead of building on it, the Government is cutting too far and too fast. This reckless approach is already hitting jobs and services
The figures have all but wrecked a plan by Mr Osborne to declare victory over both Labour and the dangers of a double-dip recession before the local elections on May 5.
Labour said that David Cameron’s claim to have moved Britain out of the economic danger zone rang hollow and that Mr Osborne should rethink the scale and speed of his cuts.
Ministers hope that the preliminary figure is upgraded, or turns out to be a blip. The economy would officially return to recession if there were two consecutive quarters of negative growth.
Even worse, as business leaders said this week, the Government has no plan for growing the economy. Labour is setting out an alternative – including action to tax bank bonuses which would raise money for projects to drive jobs and growth
Hetal Mehta, economist at Daiwa Capital Markets, said that the GDP data was “horrendous . . . an absolute disaster for the economy”.
Enam Ahmed, senior economist at Moody’s Analytics, the economic research arm of Moody’s ratings agency, said: nderline;">“The strong headwinds to growth in the coming quarters raises concerns about the economic prospects for the UK in 2011. The chances of a doubledip recession are now very high.”
Ed Balls, the new Shadow Chancellor, said of the coalition: “Simply slamming on the brakes is not a credible economic policy. It is not too late: George Osborne and the Treasury must urgently rethink their reckless plan to cut the deficit too far and too f ast and start putting growth and jobs first.”
The Conservative-led government’s approach of shrinking growth and rising unemployment is not just bad for families, it will make getting the deficit down harder.
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