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The “hurting but not working” label has often been attached to the policies of the Coalition. After this morning’s release of GDP statistics, it was confirmed that then economy shrank by 0.2% in Q4 2011. A figure which I predicted correctly just moments before by averaging other agencies predictions. https://twitter.com/#!/UOldfield/status/162099883308888065 The policies, especially economic, of this government clearly aren’t working.

Duncan Weldon of the TUC has posted on the Touchstone Blog a list of 5 key points concerning GDP. They are:

1/ The awful manufacturing numbers suggest that an ‘export-led recovery’ is unlikely. The Eurozone crisis is starting to have an impact on GDP figures, one that is set to continue and worsen into 2012.

2/ But the Economy was already stagnating well before the Eurocrisis. The stagnation in the service sector at the end of 2011 is part of a long-running collapse in domestic demand. Something that can’t be blamed on Europe. Exports  prevented us from falling into recession in 2011, that prop to growth now seems unlikely.

3/ This fall in GDP is a lot more worrying than the one in Q4 2010. Back then ‘special factors’ (the snow) were at least partially to blame and so GDP bounced back in Q1 2011. This time GDP fell without ‘special factors’.

4/ The -0.2% result was a tad worse than the OBR expected (-0.1%). It appears the November forecasts are already looking a bit too optimistic. Again.

5/ In terms of the impact of austerity, it has been noted that ‘government services’ was one of a few bits of the economy actually growing in Q4. But ‘government services’ in this GDP release don’t map exactly to ‘government spending’. The large fall in construction output could be linked to the government’s cut in its own investment, equally the stagnation in the service sector is at least partially caused by the VAT rise.

As noted by Duncan, government services actually grew in Q4 2011. Technically, the cuts haven’t effected the government’s spending data but as psychology play an important part in market activity just the announcement of cuts is enough to affect the spending patterns of some sections of society. This then has a knock-on effect in the economy and it the declining cycle begins without the government actually making any cuts. However, I believe the increase in government services to be the burgeoning welfare bill due to increasing unemployment.

What can be done?

As noted on this blog and on other blogs – we face a supply and a demand crisis.  A shortage in the supply of skilled labour as well as a lack of investment and aggregate demand. The solution to this crisis is re-skilling and tax cuts. Further reading: Welfare Cap: An Analysis; Taxes on the wealthy; Spend, Spend, Spend. Why Keynesian Remedies Do Work

Unfortunately, there are rumours that the Bank of England will roll out another round of QE. I issue caution on QE as I believe it to be a dangerous policy. Read the justification: QE – The Ship That Should Never Have Set Sail.