Sunday, 30 January 2011

One quarter doesn't make a recession

But it's half of one.

The fall in GDP in Q4 2010, coupled with more aggressive PR from Labour because of Ed Balls' appointment as Shadow Chancellor and Tom Baldwin's appointment as director of strategy (aka press manager) has changed the mood music around the coalition's attempt to get public finances in order. There's a bit more questioning of the approach: previously there was sympathy for the view that the priority was reducing the deficit, now there seems a bit more concern about growth. Mood music matters for two reasons:

- confidence is an important driver of growth. It's not enough on it's own, but it's necessary. The more nervous people (including companies) are about the future the less they will invest, spend, consume.

- although the "cuts" aren't big in themselves. they do change the direction of public expenditure. Big changes need some form of public acceptance to work. The coalition did get more votes than the opposition and has a mandate but it is fragile. It doesn't need to top the opinion polls to implement its policies but it does need at the least a grudging respect and acceptance. So far, it has this. But if we were to move into recession and there was much more questioning this respect and acceptance could disappear.

There are two problems for the coalition:
- One quarter of negative growth was always possible - but no-one expected it to be this one, the quarter before VAT increased, when people should have been out spending. The weather does seem to have made the difference, but the reason isn't relevant. The trouble is that if this quarter (Q1 2011), when there is a VAT increase as well as bad weather, also has negative growth then we are into two quarters of negative growth and a recession.

- They have not sold their approach recently, in fact for the last few months. They need to get on the front foot. I don't think it's enough to simply say, we must see the cuts through, we will not change course, The headlines need to explain why the approach is good for the economy. Even the Guardian (or at least one of their columnists) agrees that the state cannot do much to improve things. It's the private sector that will.

There are some positive points for the coalition:
- We won't know the final Q4 2010 figure until Spring, and it may improve;

- Subject to coalition breaking up, they won't face re-election till 2015. This is plenty of time for their policy to work. And if the world economy has recovered by then, the coalition will get the credit in Britain.

- Their approach is funadmentally right. They are at risk from external events - but fundamentally the interest burden (which I covered previously here) on our borrowings means the deficit has to be got under control, and the quicker that happens the quicker the recovery will come.

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