So in the second quarter of 2012 the British economy contracted by a whopping 0.7%. We’re still 4.5% below our pre-recession ’08 peak. We’re officially experiencing a second recession.
Tony Dolphin summarises:
The coalition hoped that its deficit reduction strategy would boost the economy by creating greater confidence about the future, so leading to a surge in private sector business activity. After two years during which the economy has now shrunk by 0.3 per cent, this strategy has clearly failed. Indeed, the IMF estimate that fiscal consolidation over this period subtracted roughly 2.5 per cent from growth.
Jeremy Warner insists stimulus is still not the answer, though he somehow also concedes that Osborne is getting it all wrong. Thomas Pascoe, also at The Telegraph, is on a similar page, wanting tax cuts but continued cuts in public spending. As is Iain Martin, lamenting Osborne but simultaneously ridiculing Hollande and Miliband for daring to oppose austerity.
James Kirkup, on the other hand, hypothesises the ultimate U-turn:
[Osborne] can stick to the current path, while seeking more ways to “max out Plan A” with new and ever more complex schemes to encourage private sector investment without actually spending any more public money. Or he can slow the deficit reduction plan and borrow a little more, probably for public investment and using the argument that it makes sense to take the opportunity of ultra-low gilt yields.
George Eaton doubts the latter will transpire, even if it obviously should:
The problem for Osborne is that the constraints of the coalition and his decision to rule out fiscal stimulus in advance mean that he can offer neither the supply-side revolution that the Tories crave nor the Keynesian boost that Labour seeks. As a result, he has invested much of his hope in greater monetary stimulus by the Bank of England. But with the UK caught in a classic liquidity trap – when consumers are so determined to save that greater availability of credit makes no difference to growth – he is profoundly wrong to do so.
At times of recession, when consumer spending is depressed and businesses are hoarding cash, the state must act as a spender of last resort and stimulate growth through temporary tax cuts and higher infrastructure spending. Yet it is precisely this option that Osborne has rejected at every turn, dismissing well-intentioned critics as “deficit deniers”. Today’s figures are his reward.
Matt Yglesias also argues that coalition policy is now officially a shambles:
[T]hey chose to undertake an ideologically driven effort to effect a structural shift of the British economy out of producing public services and into private market production at the very same time that the UK’s heavily financialized economy was forced to undertake other large shifts. They combined that with demand policies from the Bank of England that were totally inadequate given what they were trying to do on the fiscal side. And on top of that, they’ve raised a bunch of taxes for no reason at all that I can tell. It’s a total mess.
Graph courtesy of the Coffee House.