Economic Nightmare?

After four consecutive quarters of growth, the UK’s economy has dramatically shrunk to -0.5% in the last three months of 2010.

Whilst this figure is set for revision over the next two months, the contraction has taken economists by surprise, as forecasts had predicted for growth to be between 0.2% and 0.6%.

Though the Chancellor of the Exchequer, George Osborne, responded by stating that the figures were disappointing, he went on to say that the cold weather in December had contributed a large part to the past quarter numbers, and the coalition government will continue to stick to their economic programme of public cuts:

‘There is no question of changing a fiscal plan that has established international credibility on the back of one very cold month. That would plunge Britain back into a financial crisis. We will not be blown off course by bad weather.’

The general secretary, Len McCluskey of Unite, Britain's biggest trade union, claimed it was, however, ‘beyond belief’ that the government was blaming the weather for ‘these appalling growth figures’.

‘George Osborne sounds like a rail boss trying to blame delays on leaves on the line,’ he continued to say. ‘The blame lies squarely on this government's policy of massive spending cuts with no strategy for growth’.

Even the Office for National Statistics (ONS), who published the 0.5% contraction, has said even if the weather impact had been excluded, the level of economic growth would still have been flat, at 0% - not a promising sign, after a year of economic 'recovery'. More worryingly, alongside this, the ONS stated that these numbers focus more on the output side of the economy, like services, construction and manufacturing, and do not concentrate on consumer spending. But it was this factor that was the worst hit by the weather last quarter, meaning the second estimate may bring even more horrible news.

With expected tax rises and extensive public spending cuts yet set in this year, there are large fears of where the UK’s economy growth will stem from, and when it will begin to stabilise. Huge public sector job losses, and looming inflation seem to create a chaotic background to the coming few years.

Hetal Mehta from Daiwa Capital, confirmed the bleak outlook, stating: ‘It seems that the economy is incredibly vulnerable. And with the fiscal tightening yet to fully bite, we will have to brace ourselves for a bumpy ride.’

Even though it is expected the first quarter of this year will experience higher growth, from postponed economic activity due to the heavy snow in December and beginning of January, all future figures will be analysed extremely closely for signs of further contraction.

Ed Balls, the recently appointed shadow chancellor, sprung at this opportunity to attack the coalitions fiscal plan, urging Mr. Osborne to do an economic U-turn before it was too late, implying that with further application of their programme, the UK could quickly find itself suffering from stagflation – rising inflation and unemployment, matched by a slow growing economy.

"this is an economy which was growing in the middle of the year, which has now ground to a halt," he said.

"We have inflation going up, unemployment rising, now the economy not growing. And all those boasts from George Osborne and David Cameron that they'd secured the recovery - it seems as though the opposite has happened."

"As the head of the CBI said only yesterday, this government has no plan for growth and it is taking political decisions regardless of the damage they will cause to job creation and business. Simply slamming on the brakes is not a credible economic policy."

Confrontation with rising inflation raises more concerns, as the Governor of the Bank of England, Mervyn King, reported yesterday that standards of living are to fall to new levels, which have not been seen since the 1920s. With wages failing to match growing inflation, reaching 4 – 5% over the coming months, families will find their income worth less, as prices for everyday purchased items begin to climb. Causes of this rise have been put down to increases in global oil and commodity prices – and the rise in VAT tax set in by Mr. Osborne earlier in January.

More depressingly, Mr. King went on to say he was unable to offer any immediate hope of a rise in interest rates to counter inflation, because of the poor economic outlook. He warned that the Bank ‘neither can, nor should try to, prevent the squeeze in living standards’.

So are there any positive figures, which could make UK citizens a bit more optimistic for the future?

Fortunately there are two. The first involves that of the manufacturing industry – one of the only strengthening areas of the UK economy, which is very important for the long term. And secondly, and perhaps more uplifting, both the claimant count and tax receipts have not been effected hard by the contraction; both of these have provided early warning, in the past, of a faltering economy. With unemployment only falling very slightly, and tax receipts almost matching official forecasts, these are not the signs you often see in a continually shrinking economy.