Andrew Lilico is Policy Exchange's Chief Economist.
This morning’s GDP data constitute a horror story for
businesses, for unemployment prospects, and for the public finances. Contrary to the expectations of only a few
weeks ago that the second quarter might have been flat (neither growth nor
contraction) or even of the consensus expectation this morning of a 0.3%
contraction, GDP in fact contracted by 0.8%.
Government Ministers have attempted to spin this as a “considerable easing in the downturn”. “Easing” of this sort, if sustained for the
rest of the year, would result in a full year contraction of above 5.2% of GDP
– worse even than the peak of the Great Depression in 1931.
It is clear now that in Q2 we have only the
shrivelled yellow shoots of recovery, probably largely as the result of an
inventory snapback (in the final quarter of 2008 and the first quarter of 2009,
companies produced little and ran down their inventories to very low levels, so
that in the current quarter it was necessary that firms should increase their
production, just in order to avoid running out of stock). Looking forward, it is now less likely that
the third quarter will see growth, but my view remains that we will get growth
in the fourth quarter and perhaps also in the first quarter of 2009.
This will mean that, going into the likely
General Election period, the Government will be able to claim that growth has
returned. It will probably seek to take
credit for this growth, as a result of Government policy. It will be correct, and that is a
problem. Because the growth over those
six month will, in my view, be the inevitable lagged effect of a one-off
massive policy stimulus consisting of interest rate cuts of more than 5%, a
doubling (perhaps by then a tripling) of the monetary base (the quantitative
easing programme), and a £200 billion budget deficit. If economic stimulus on this scale does not
result in at least one or two quarters of growth then the economists might as well
go home.
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