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Is the economy set to grow by 1% or less in 2011?

George Osborne won’t be able to eliminate the deficit if the economy is barely growing – and growth of 1% or less would be a disaster for Britain.

Two weeks ago I wrote about the UK’s latest employment, inflation and retail sales numbers – calling them the (arguably) good, the bad and the ugly. I ended by noting that the British Chambers of Commerce’s Chief Economist was warning that GDP (national income) growth in the second quarter of this year could be as low as 0.3%. Given that the economy stagnated in the 6 months to March (a fall of 0.5% followed by a rise of 0.5%) that would represent the economy growing by only 0.3% over 9 months – a terrible performance on any measure.

In the last two weeks three important bits of data have added to our understanding of how the economy performed in the second quarter – and all point to a weak picture.

Surveys of purchasing managers (known as PMIs – purchasing managers indices) are a good indicator of economic activity and are released much more quickly than official figures from the Office of National Statistics. In the past week PMIs in the manufacturing, construction and services sector have all suggested that economic activity is slowing.

On Friday the Manufacturing PMI showed that the sector, one of the few bright spots in Britain’s slow recovery, was growing at its slowest pace in almost two years. Not only are domestic orders falling as the government’s austerity saps demand from the economy, but the growth of export orders has also slowed. This looks like a broad-based slowdown in manufacturing – until now a key prop to a weak economy.

On Monday the volatile Construction PMI slowed further whilst confidence in the sector fell to the lowest in a year and the rate of job cuts rose to its highest since January.  

Finally, yesterday, the all important Service PMI came in marginally better than many analysts had expected but was still described as ‘lacklustre’. One city economist noted that:

'It was a relief that it wasn't weaker, but that's not to say it's a particularly great outcome… We really need to see the PMIs bouncing back now or we're talking about GDP growth this year of 1 percent or lower.'

Growth of 1% or lower for 2011 compares to an Office of Budget Responsibility (OBR) forecast of 1.7% – an estimate that has already been revised down three times in the past year.

Back in March the OBR forecast was for 0.8% growth in the first quarter and 0.4% in the second. We now known that first quarter growth was actually only 0.5% and second quarter growth looks increasingly like undershooting the 0.4% forecast.

All of this makes for a headache for the government – as the growth forecast is revised down so is the projected tax take, while unemployment and welfare expenditure are revised up.

George Osborne won’t be able to eliminate the deficit if the economy is barely growing – and growth of 1% or less would be a disaster for Britain.

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

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