It's been a tough week for those who try to forecast the economy, or at least for me specifically. As I noted just yesterday, the UK's budget deficit for the 2011/12 fiscal year turned out to be exactly in line with the budget projection and not, as I predicted a month or two ago, significantly lower. And today we learn that real GDP fell 0.2% in Q1 of this year, belying widespread expectations of a marginal increase. It's a good thing I don't get paid to do this sort of thing any more (or perhaps I should say, this may be why I don't get paid to do this any more).
The latest fall in GDP, coming on the heels of a 0.3% fall in the final quarter of 2011, means that the UK has slipped back into the much-feared, and even more hyped, "double dip recession". There's a reasonable summary of the data, plus analysis from Stephanie Flanders, in the BBC story here. Ms Flanders makes the worthwhile point that even if the Q1 number had turned out to be marginally positive, it wouldn't really have changed what most people already know: the UK economy is bumping along the bottom, and it's not clear where fresh growth momentum will come from. Real GDP is now slightly below its late 2010 level, and still 4% lower than it was before the financial crisis hit. This sort of "recovery" is simply without precedent.
So, at the risk of sounding like the tabloids, what is the government going to do about it? Not much, it would appear. David Cameron called the data "very, very disappointing", but said there could be no change of course. Austerity rules, OK? Indeed, as I noted yesterday, the Treasury has just asked government departments to identify a further 5% in spending cuts in order to ensure that deficit reduction plans don't go off course.
It's very likely that these further cuts will come from public sector investment spending, rather than current outlays. However, the Q1 GDP data strongly suggest that this would be wildly wrong-headed. The main culprit in the weakness in Q1 was a 3% fall in construction spending, which cannot be unrelated to the sharp decline in public sector investment as the austerity programme bites: as I pointed out yesterday, central government investment outlays fell 40% in the fiscal year just ended. (One specific culprit for Q1 may be the Olympic park project. All of the major construction activities there have been completed in recent months, leaving only cosmetic works to be carried out before the Games begin in July).
The accuracy of the ONS data on construction has been called into question in the past, and indeed this latest surprise fall in GDP has led some analysts to question the reliability of the national accounts data more generally. Still, even if the data are not precisely correct --and they're not -- it's surely important to acknowledge Stephanie Flanders's point: we all know the economy is just bumping along, going nowhere.
As I've said here more than once, it was recognised long before Keynes came along that recessionary times were an ideal opportunity to carry out big projects. Or to put it another way, when the economy's in a hole, start digging! Think Dave and George are listening?
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