Even without the effect of the bad weather, today’s GDP figures are disappointing. The Office of National Statistics is at pains to point out that its preliminary estimate of a 0.5 per cent contraction in GDP in the fourth quarter of last year would in fact have been ‘flattish’ if the weather had been better.

But even a flattish result is still bad news. It shows that the fall from the second quarter (0.9 per cent growth) to the third quarter (0.7 per cent growth) was not a blip but a trend, and that our economy did indeed weaken in the second half of the year. This bodes ill for 2011.

I don’t want to crow, but when the previous figures had come out we at Demos did sound a note of caution. Where the Government and City were delighted with a 0.7 per cent figure, we saw some worrying aspects to those results.

First, the third quarter figures were driven mainly by a strong bounce in the construction sector, which in turn was mainly due to a huge catch-up from that sector’s previous contraction. As expected, that has now corrected a little this quarter. Second, whilst being higher than the City had expected, the third quarter figures did still represent a fall and were perfectly consistent with what appeared to be a collapse in sentiment in the autumn that would feed through to lower figures now. That analysis has been shown to be true.

That collapse in confidence could have been due to the dramatic rhetoric around the emergency budget in June and the spending review in October. If so, the Government shifting its rhetoric to growth may yet help.

In addition, there is a glimmer of hope in the manufacturing sector, where the low exchange rate is supporting exports. But on the other hand this may end if the recent rise in inflation encourages the Bank of England to raise rates. Indeed at a lecture in the City last night, Monetary Policy Committee member Andrew Sentance said now was precisely the time to do just that.

This rise in inflation will have another effect: it means that the Government’s plan B, namely to keep the economy afloat by printing money in the event of a double-dip recession, becomes less possible. So whether the weather is cold or hot, there will be increased concern in Whitehall today as to whether this is an economic storm that can actually be weathered at all.

New Comment