2011 is looking bad – but 2012 may be worse
In my last two posts on False Economy I’ve noted the rapidly vanishing growth estimates for the second quarter of 2011. Whilst the government’s own Office of Budget Responsibility is forecasting growth of 0.4%, the highly respected National Institute of Economic & Social Research is now forecasting growth of only 0.1%, which would be growth of only 0.1% over 9 months.
But the NIESR is far from the most pessimistic, with several city economists now forecasting an actual fall in national output in the months between March and June.
These forecasts are hardly surprising – industrial production and manufacturing are now clearly ‘double dipping’ with output falling.
Britain is already experiencing a ‘consumer recession’ with household spending being squeezed by falling real wages as high inflation and slow earnings growth bite. The result has been very weak retail sales.
In other words almost no sector of the economy is performing well and the real fiscal tightening is just starting to kick in.
Even if Q2 growth turns out to be positive (and very weak growth remains the most likely option) the headwinds in Q3 and Q4 suggest that 2011 growth is going to be incredibly weak.
Weak growth means slow progress in bringing down unemployment – and hence a higher welfare bill and lower tax revenues. All of this makes George Osborne’s plans to cut the deficit less likely to succeed.
The real risk now is that in the autumn, when the OBR next updates its growth forecasts, the watchdog will be forced to accept reality and make large revisions downward. Big downward revisions to growth will mean big upward revisions to the deficit.
George Osborne has rhetorically bound himself to deficit reduction, and his likely reaction on seeing a larger deficit forecast will be more spending cuts and more tax increases. The self-defeating of austerity of 2011 may well become worse in 2012.
Duncan Weldon is senior policy officer at the TUC and blogs at Touchstone.
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