Tuesday, January 25, 2011

Economy contracted in Q4 2010

The only people shocked by today's bad figures are Tories.

I'm sure they will rush out to blame the weather - but even if you strip out cold-weather effects, growth would have been non-existent. This is very serious because the contraction happened in Q4, which is the most important trading period of the year. If we can't grow in Q4, when can we grow?

Ed Balls and others pointed out that if you attack the economy while it is still fragile, you are attacking the private sector, which leads to a drop in growth. Especially as most of the "cuts" the government made so far were cuts to contracts held by the private sector.

It was all compounded by Osborne holding his emergency budget in October, just before the important Christmas trading period, when most businesses make most of their profits. He gleefully frightened voters, telling them that he was going to axe public sector jobs - but didn't say which jobs, so that all 5 million public sector voters shut their wallets tight and stopped spending. Which again impacted the private sector.

Osborne can't seem to grasp that economies run on confidence. People don't spend unless they feel confident about their jobs. It's fear that holds economies back, not fiscal policy. And if you frighten the economy into contracting, you end up with a bigger deficit as tax receipts shrivel - ask Ireland, who were running a budget surplus in 2007 and might have ridden out the financial crisis if they hadn't decided to take an axe to their economy at the same time.

What's just happened is a vote of no confidence in Osborne by consumers.


Anonymous said...

So if the Union led Labour party had still been in power there would be no cuts,watch out for those flying pigs.

An Eye On... said...

Do you not think that inflation mixed with two years of low or in a lot of cases no pay rises has led to this?

People's incomes are falling in real terms. Therefore they spend less.

Either incomes need to rise faster than inflation or inflation needs to fall below pay rises. Being as one leads to higher inflation and the other we have no control over as it's mainly external, then we are snookered. Sooner or later interest rates will have to go up whether the people, the banks, business or the government wants it or not.

Then the fun will start. This is just the entree, wait for the main course.