As Gordon Brown finally called the general election for 6 May, it became increasingly clear that the economy avoided sliding back below the zero line in the first quarter. Overall, sentiment in the construction sector has turned positive for the first time in two years. The CIPS index, tracking the services sector, fell back in March but still indicated expansion, while the sub-index measuring employment pointed to growth in jobs for the first time in two years.
A quarterly survey by the British Chamber of Commerce (BCC) painted a similar picture of the services sector, but showed that manufacturing stagnated. Investment spending in both sectors declined. We avoided “a double-dip” but “this is not a strong recovery”, said BCC chief economist David Kern.
What the commentators said
Nor will it strengthen much from here, as Sam Fleming pointed out in the Daily Mail. “Britain remains pinned to the sick-bed.” Our biggest export market, the eurozone, stagnated in the fourth quarter. As for the domestic economy, Britons are still sitting on a debt mountain of £1.4trn, which will have to be gradually worked down. Deleveraging is “not helpful for economic recoveries”.
Tight credit also remains a concern. The slide in investment highlighted by the BCC survey is a “worrying” sign that a lack of access to credit will hamper investment and hence growth, said Daniel Pimlott in the FT. And the stabilisation in unemployment may not last long, given that the “public sector recession…hasn’t hit the jobs market yet”, said Bernard Brown of KPMG.
The budget deficit is over 11% of GDP, and “even Labour’s fuzzy plans” to reduce it imply cuts to departmental budgets of 11.9% over a parliament’s timespan, as the FT pointed out. The Tories would cut deeper. Unsurprisingly, none of the parties “has had the courage” to disclose how exactly they would make these cuts. But the bottom line is that deeper cuts than Margaret Thatcher achieved are planned. The “jittery bond markets” will force fiscal discipline on Britain whoever wins the election, said Fraser Nelson on Spectator.co.uk. The cuts will come, even if the IMF ends up making them.
So not only are we in for a weak recovery as we work off the hangover from the credit bubble, but the protracted fiscal squeeze will also bear down on growth. The recovery will be “sluggish and fragile” and “a double-dip recession is still a risk”, said the BCC’s Kern. And that would imply even more red ink in the public finances given that borrowing projections are based on optimistic growth figures, said David Wighton in The Times. So, whoever wins power “faces a gruelling few years”, said the FT.