Climate of opinion turns against Osborne

LONDON BRIEFING:City was left cold by chancellor's attempt to blame weather for contraction of GDP, writes FIONA WALSH

IN WESTMINSTER last night, they were calling Ed Balls, the new shadow chancellor of the exchequer, the man with the easiest job in Britain. After all, who needs to destroy George Osborne’s economic credibility when the chancellor is doing such a convincing job of that himself?

The 0.5 per cent contraction revealed yesterday in the British economy over the final quarter of 2010 was a truly shocking figure. It significantly increases the risk that Britain is hurtling towards a double-dip recession and, after last week’s worse than expected inflation data, raises the horrifying prospect of stagflation – that toxic combination of slow economic growth, high unemployment and rising prices.

Osborne came out fighting in the face of data that was variously described as “horrendous”, “shockingly bad”, “an absolute disaster” and “scarcely believable”. He would not be diverted from his chosen course of slashing spending to get the deficit under control: “We will not be blown off course by bad weather,” he said.

Any suggestion the admittedly costly arctic weather that swept through the country last month was solely responsible for the dire performance of the economy over the last three months of 2010 is utterly misleading, however. The Office for National Statistics, which compiles the GDP data, made it clear that, excluding the snow disruption, the figure would have been flat. A flat figure is clearly not as bad as a 0.5 per cent contraction, but it still shows the fragile recovery in the economy last year came to a shuddering halt in the final quarter, a stark contrast to the 1.2 per cent growth seen in the second quarter and 0.7 per cent in the third.

Within the data, the dominant services sector – which accounts for around three-quarters of the economy – shrank by 0.5 per cent, while the construction sector suffered a 3.3 per cent reverse; not too much of a shocker, perhaps, given the worst winter weather in 100 years.

Manufacturing fared better and was the strongest component in the data, with growth of 1.4 per cent. However, the sector accounts for little more than a tenth of GDP.

There was widespread shock in the City and at Westminster when the data was announced. On seeing the figure, many assumed it was plus 0.5 per cent – the consensus forecast – rather than a contraction.

Reaction was swift and brutal: Len McCluskey of the Unite union likened Osborne to “a rail boss trying to blame delays on leaves on the line”. The blame, he said, lies squarely on the government’s policy of massive spending cuts with no strategy for growth.

Balls has long warned about the dangers of the Osborne approach – last August, when he was fighting for the Labour leadership, he dismissed the chancellor’s economic policy as “the equivalent of ripping out the foundations of the house just as the hurricane is about to hit”.

In the same speech he highlighted the dangers of too-rapid deficit reduction, saying the coalition cuts were not just unfair, but both “unnecessary and economically unsafe.”

The government’s growth strategy has also been called into question from a somewhat surprising source – Sir Richard Lambert, head of the employers’ organisation CBI. The shadow chancellor, still just a few days into his new role, must have watched with delight on Monday as Lambert chose his valedictory speech to launch a devastating attack on the government, accusing it of putting politics before economics in a way that was “apparently careless of the damage they might do to business and job creation”.

It was not enough just to “slam on the spending brakes,” said Lambert, before going on to pose the crucial question: where is the growth going to come from?

Yesterday’s figures are, of course, only a first estimate. Data tends to be revised upwards and the eventual outcome may not be quite so bad. Treasury officials yesterday were keen to point out recovery rarely comes in a straight line and it is not unusual for several quarters of recovery to be followed by a couple of flat or even negative quarters.

The data strengthens the case for the Bank of England to leave interest rates where they are, despite rising inflation. In a speech last night, Bank of England governor Mervyn King admitted inflation is likely to rise to “somewhere between 4 per cent and 5 per cent” over the next few months, before falling back next year.

The recovery will be “choppy” he said, but he believes the right course has been set.

If only the rest of us could be so sure.

Fiona Walsh writes for the Guardiannewspaper in London