The latest revised GDP data from the ONS shows that the UK economy shrank even faster than they initially thought in the three months to Dec 2010. Output was down 0.6% rather than the 0.5% first estimated, largely thanks to a greater-than-expected drop in the services sector, where output was revised down to - 0.7% from - 0.5%. Industry also performed less vigorously, although the sector did at least manage to post some growth – output was up by 0.7% rather than the 0.9% initially stated.
The ONS data also shows household spending down by 0.1% for the same period, indicating that consumers’ belts were already being tightened despite the festive season and the fact that VAT (which went up to 20% in January of course) was yet to rise. A trend which the latest Income Tracker survey backs up. Compiled by the CEBR on behalf of supermarket Asda, the survey estimates that the average UK family had £174 a week in disposable income in January (defined as the surplus after paying essential bills), compared to £183 a week a year previously. Bad news for travel firms and restaurants.
That’s the 13th consecutive monthly drop and the biggest year-on-year fall since the survey began in 2007, and it’s largely down, says the CEBR, to inflation. The cost of goods and services – especially petrol – is rising a lot faster than incomes.
Even the comfortably off are feeling the pinch, as that bellweather of middle class financial sentiment, John Lewis, attests. It reports ‘subdued’ sales in its department stores for the fifth week running, suggesting that VAT and general economic uncertainty are holding spending back. It’s not all bad news for the employee-owned business though – its foodies favourite supermarket chain, Waitrose, saw weekly sales in February up 13.3% to £98.4m thanks to Valentine’s Day treats.
Of course, any unexpected extra GDP shrinkage is most unwelcome, but there are extenuating circumstances. December was one of the coldest on record - weather like that is enough to make anything shrivel and by a lot more than 0.1% too. Take out the 0.5% fall which the ONS estimates was down to the cold snap and the underlying figure is at least less bad – a shrinkage of 0.1% suggesting that the economy is ‘only’ flatlining. So that’s alright then.
All of which provides plenty for our policymakers to chew on. On the face of it, these gloomy ‘growth’ (ahem) figures might stave off the prospect of a rise in interest rates for a while longer – with three of the nine MPC members voting in favour last time, a rate rise was looking increasingly imminent. But on the other hand, it’s the effect of inflation – now running at over 4% - which is eating up disposable income and killing consumer confidence.
Much of that inflation is imported however, and effectively beyond the control of our government and institutions. So while a rate rise might damp down inflation, it would almost certainly subdue growth. It’s the proverbial catch 22.
What’s increasingly apparent is that a macroeconomic strategy to stimulate business and promote growth is required, and fast. Otherwise the spectre of stagflation looms, a vicious cycle which it can be very hard to escape from. Just asks the Japanese.