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As the economy sinks, even Osborne’s former cheerleaders get cold feet

The heads of the IMF and the world's largest bond fund call for a Plan B.

The third quarter of 2011 is proving to be a very difficult time for the UK economy.

The crucial services sector has had its worst month-on-month slowdown in a decade, manufacturing appears to be contracting and construction is weak.

Today’s retail sales figures were another reason for concern with high street spending continuing to fall.

Our largest trading partners, the Eurozone and the US, are experiencing their own slowdowns which hardly bodes well for George Osborne’s hopes of ‘export-led growth’.

Domestic demand has been extinguished by a combination of government austerity, collapsing confidence and falling real wages. External prospects are weak.

As Markit (which compiles the monthly surveys of business purchasing managers) says (pdf):

“The PMI surveys collectively pointed to a near-stagnation of economic growth in August, signalling an increased risk that GDP growth in the third quarter could be even weaker than the 0.2% rise seen in the three months to June. Forward-looking indicators also suggest that the economy could weaken further at the end of the quarter, raising the prospect of a slide back into contraction in Q4 – if not in Q3… Consequently, we expect the UK economy to struggle to expand by more than 1.0% in 2011.”

Against this background it is unsurprising that former cheerleaders for the government’s agenda are starting to get cold feet.

The Head of the IMF has twice warned in recent weeks that “we know that slamming on the brakes too quickly will hurt the recovery and worsen job prospects”.

Meanwhile Bill Gross, who runs the world’s largest bond fund and warned in January 2010 that the UK govement had to cut spending, now says:

"The economy in the UK is worse off than it was when the plan was developed, so there should be at minimum fine-tuning and perhaps re-routing of the plan…The UK is actually in the best position of all to make a mid-course correction…A mild re-adjustment that might keep the economy out of recession would be viewed very favourably."

When the economy is falling into a renewed slump – and both the Head of the IMF and the world’s largest bond investor are saying that tough cuts are hurting the recovery – it’s time for George Osborne to look at his plans again.

Duncan Weldon is senior policy officer at the TUC and blogs at Touchstone.

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