Double-dip just got deeper
Today’s revision to the GDP figures for Q1 not only confirm that the UK economy is back in recession, they show that this recession is deeper than we previously thought. With a two quarters of negative 0.3%, it is hard to argue that the double dip is a flat lining of the economy over the last six months. This is real recession; economic decline and it wasn’t part of the plan.
Looking deeper at the new numbers published today, we can see that it was the construction sector that is weaker, due to the slump in house building and the decline of public sector capital spending.
Earlier this week the IMF said that the UK should take action to support growth “if downside risks materialize and the recovery fails to take off”. The IMF accepts there are risks to easing policy – not least to the credibility of the government’s plans for medium-term fiscal consolidation – but it warns that there are also risks associated with not taking action. In particular, the longer economic growth is weak, the greater the risk to the economy’s long-term potential growth rate.
The IMF wants the Monetary Policy Committee to take immediate action. It says that the scale of quantitative easing should be increased and that consideration should be given to a cut in the bank rate, which is already at an historical low of 0.5 per cent.
The report also suggests that the UK could undertake ‘balanced budget fiscal expansion’. By this the IMF means temporarily increasing tax revenues or cutting spending in ways that will have a relatively small effect on demand, and using the funds to boost public spending in areas where it has a large effect on demand. It suggests smaller increases in public sector pay and better targeting of transfers (which might mean, for example, restricting winter fuel allowances and free travel passes to better-off pensioners) and using the funds to increase infrastructure spending.
In other words, the IMF wants a Plan B. The question is whether, politically, the Chancellor and Prime Minister feel able to move on fiscal policy. Having persistently ruled out any move to a Plan B and said repeatedly that taking on more debt is not the solution to a crisis caused by debt, it would represent a big shift in their position. Even with the cover of the support of the IMF, it may be too big a move for them to make.
But Nick Clegg seemed to be break ranks, telling the FT that Treasury officials had been ‘instructed’ to make a “massive” boost to house building and infrastructure spending. At least the Deputy Prime Minister seems to accept a change in tone is necessary, even if what he was talking about turns out to be not an actual change in Treasury policy.
Surely no more evidence should be needed that the recovery is failing to take off. The plan to remove the deficit in this Parliament is long gone. The double dip is a reality. It is too late for contingency planning; it is time for action. It’s time to accept a real and credible Plan B.