George Osborne rules out change of course despite 'stagflation' fears
The government was reeling today over the shock contraction of the economy by 0.5% in the last quarter of 2010, a performance that raises the prospect of a double-dip recession and suggests some cabinet ministers will press the Treasury to reconsider at least the timing of spending cuts.
The chancellor, George Osborne, and the prime minister's spokesman both ruled out any change of course, blaming the worst weather in a century for the unexpected slowdown.
But No 10 and the Office for National Statistics acknowledged that even when the bad weather in December is taken into account, growth in the final quarter was flat – far worse than independent forecasters had expected.
The figures are an early boost for the new shadow chancellor, Ed Balls, who has long argued that the government is not doing enough to protect the recovery.
He said: "Simply slamming on the brakes will not work. It is not a strategy."
He urged Osborne not to "make up excuses about the weather. That is not a strategy. Don't make excuses when you need to make a change. Do it quickly. Don't get dug in."
No 10 refused to rule out a second quarter of negative growth in the first three months of this year – the technical definition of a recession. With inflation hitting 3.7% last month, there are also growing fears the UK is heading for an unpleasant dose of "stagflation".
Ministers and parts of the civil service acknowledge the worry is that the economy is clearly worse prepared than expected for the VAT rise introduced in the new year or the coalition public spending cuts that are only due to bite this year.
Government officials acknowledge that they had not expected the slowdown even if they point out that emergence from recessions in the 70s, 80s and 90s was choppy.
David Cameron told the cabinet that tackling the deficit will remain the priority, arguing cuts in spending remain the prerequisite for the return to growth.
Officials said the figures will mean that growth forecasts in the March budget prepared by the Office for Budget Responsibility will have to be sharply revised, but they hope that the change in the forecast need not lead to a massive revision of the public finances.
The officials pointed out that public finance receipts in December had been strong, reducing the need to change spending. On the brighter side they suggested that the figures will mean the Bank of England is unlikely to raise interest rates despite the inflation figures.
More broadly, officials were startled by the figures partly because the retail receipts over Christmas had been strong and other independent surveys had not foreseen this kind of collapse. The ONS figures do not cover precisely the December numbers and may largely be based on forecasts.
Officials pointed to the slowdown in construction, saying the industry is traditionally volatile, arguing the upturn in manufacturing may be a sign of long-term revival in the private sector .
The risk for the government is that the lower-than-expected tax receipts will draw it into a cycle of further spending cuts, lower growth and lower receipts.
Even independent analysts such as Gavyn Davies said these figures seem much too bad to be true, and not just because of the weather.
The underlying growth rate of private sector GDP probably remains at about 2% on an annualised basis, and it would not be at all surprising to see a sharp rebound in recorded growth in the current quarter. Nevertheless, the recovery in the UK economy, while still intact, continues to run at a less impressive pace than we are seeing elsewhere in the developed world.Resources: George Osborne rules out change of course despite 'stagflation' fears
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