First the good news on the economy

25 Oct 12
Tony Dolphin

The UK is out of recession, but it still faces a growth crisis. The chancellor must boost infrastructure investment without delay

This morning we learned from the ONS that the UK is out of recession. This is great news. Real GDP increased by 1.0 per cent in the third quarter of 2012, more than most predicted it would and the best growth for five years.

However, two special factors need to be taken into account. First, the extra bank holiday in June for the Queen’s Diamond Jubilee may have depressed output by 0.5 per cent in the second quarter and this means that some of this quarter’s higher growth is merely a bounce-back, rather than a meaningful increase. Second, the ‘Olympics effect’ may have boosted growth by 0.2 per cent in the third quarter.

This means that underlying growth in the third quarter was actually closer to 0.3 per cent. Looking at the longer-term picture, GDP has been unchanged in the last year, and has grown by only 0.6 per cent in the last two years.

Even the Office of Budgetary Responsibility has admitted the possibility that the government’s austerity plan may have held back growth. Chiefly, however, weak growth can be accounted for by the combination of high food and energy prices (which have hit consumers hard), exports falling short of expectations due to the euro crisis and a shortage of credit for small businesses which has led to weak business investment.

Despite today’s welcome increase in GDP, the outlook is still very uncertain, not least due to the prospect of increases in food and energy prices renewing the squeeze on households. The government should attempt to mitigate the negative effect its austerity measures are exerting. The autumn statement is an opportunity for George Osborne to address these problems.

Spending on infrastructure gives the biggest boost to the economy in the short-term. Osborne should announce an immediate increase in infrastructure spending of £15 billion over the next two years to kick-start growth. If there are any infrastructure projects that are ‘shovel ready’, including road repairs and fixing schools and hospitals, such an injection of investment should serve to get these projects under construction.

This would also provide a boost to the construction industry, which was one of the big losers in today’s announcement, its contribution to the GDP having contracted by 2.5 per cent on the last quarter.

In the medium term, Vince Cable’s Business Bank should be given a wider remit and significant funding – Institute for Public Policy Research recommends £40bn – to make a difference. It should provide long-term loans for infrastructure projects, such as railway building, and to small and medium-sized enterprises. This would help to increase growth, as well as provide mechanisms to make returning to growth in future recessions much easier and faster.

The UK is no longer in recession, but despite today’s encouraging figures, there is still no room for complacency. The UK is in the midst of a growth crisis, and the government should be playing its part in helping us to overcome it.

Tony Dolphin is chief economist at the IPPR


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