Don't blame it on the weatherman
Posted By Andrew Sissons
25 January 2011
The UK’s sudden lurch back into negative growth has caught a lot of people off guard. The Chancellor has put the 0.5% fall in GDP down to the extreme weather, but that only tells part of the story – today’s figures are a serious cause for concern, and have brought the prospect of a double-dip recession back onto the agenda.
Of course, there is some good news within the figures – the continued resurgence of manufacturing should repair some of the serious damage done during the recession. The impact of the weather (which the ONS says is partly responsible for the shock figures) has led some commentators to speculate that the economy may back bounce at the start of 2011, but the impact of inflation and VAT rises makes this far from certain.
There are two very serious causes for concern in today’s figures: the bursting of the construction bubble, and the contraction in the previously resurgent knowledge-intensive services.
The collapse in construction output – down by 3.3%, of which only 0.1% is attributed to the weather – represents a serious reversal for the sector. Construction was the driving force behind the recovery seen earlier in 2010, a recovery that now looks to have been temporary and unsustainable. This is not entirely surprising, but it is very bad news.
Much more serious is the decline in business services and finance, where a 0.7% contraction cannot be put down to the weather. This knowledge-intensive area has been the strongest performing part of the economy during the recession (and over the last 30 years). Along with manufacturing, this is the key sector that should drive the recovery. Such a large contraction in such a vital sector is a very worrying sign for the year ahead.
Why should business services and finance have contracted so sharply? One explanation is that this area has been the main victim of cuts in public spending so far – rather than cut jobs, councils and government departments are likely to have cut spending on their suppliers first. If this is the case, it is vital that the sector can find new private sector markets quickly (either in the UK or abroad), or there is a risk that the sector will have to lay off highly skilled staff, eroding the UK’s expertise in knowledge-intensive services.
Whatever the explanation for this blip in the recovery, it emphasises the critical need for the government to deliver a convincing growth strategy. I set out a series of challenges for the economy in an article Eight challenges for the UK economy a few weeks ago, and none of these have changed in the light of today’s figures. The UK needs to focus relentlessly on innovation, productivity and exports, while managing macroeconomic conditions in a way that responds to the economic rather than the political climate. It’s about the economy – not the weather.
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