From the TUC

GDP figures: unsurprising underperformance

27 Apr 2016, by in Economics

GDP Headlines:

With statistics released today showing that GDP increased by a paltry 0.4 per cent in the first quarter of 2016, evidence suggests that a strong and secure economy is still a long way off.

This fall from the 0.6 per cent growth in the fourth quarter of 2015 was not unexpected. The average market forecast was of GDP growth of 0.4 per cent, although the OBR had predicted 0.5 per cent.

Yet despite George Osborne’s comment that: “It’s good news that Britain continues to grow”, these figures are surely very disappointing.

 

Quarterly GDP gr

 

The blue line in the chart above shows how GDP has changed each quarter since 2000. Although this statistic is ‘jumpy’, let us not be blind us to an important trend. The average quarterly GDP growth between 2000Q1 and 2007Q4 was 0.7 per cent, as shown by the grey line. Post-crisis we’ve barely reached this, let alone ventured above. And the 2016 Q4 figure released today of 0.4 per cent (shown in orange) was almost unheard of in the pre-crisis times.

 

So whilst weaker GDP growth may have been expected, it is no less worrying. These figures show that since the financial crisis sustained growth has not been achieved; it has moved forward only in fits and starts.

 

Sector-by sector

As seems to always be the case, the economy’s growth that we do see is heavily reliant on the service sector, which grew in 2016 Q1 by 0.6 per cent. Although this is a slowdown from the 0.8 per cent in the previous quarter, the economy remains severely imbalanced. On the year services have grown by 2.7 per cent, compared with a three-year-low in overall growth of 2.1 per cent.

 

In contrast to this, 2016 Q1 saw falls in several non-service industries. Of particular note is manufacturing shrunk by 0.4 per cent, which means that on the year manufacturing has fallen by 1.3 per cent. The overall index of production was down by 0.4 per cent between January and March. Also of interest was construction, which shrunk by 0.9 per cent over the last quarter, meaning that compared with 2015 Q1 construction is down 1.7 per cent. Manufacturing remains 7 per cent lower than it did before the recession, and construction remains 4 per cent down.

Contributions to GDP growth

 

 

This chart shows the contributions to GDP growth from different sectors, with services more disaggregated than in the previous discussion. The final column shows how this first quarter of 2016 compares with the previous quarter. It is clear that all the growth in quarter 1 2016 has come from services, and that the decline in growth can be explained by a slowdown in business and finance coupled with falling output in construction and manufacturing.

What should our conclusions be?

While there are concerns that the referendum is exacerbating economic weakness, what is obvious is that the Chancellor’s economic plan is not working.

Aggressive spending cuts have served to depress the economy, yet have not improved the public debt ratio. They have compounded low earnings growth, the depth and duration of which is unprecedented. This is not to mention the social impact of falling welfare support and diminished public services.

The underperformance of the economy in these circumstances is unsurprising. As we argued in the budget statement demand should be expanded by public spending on infrastructure, removing the public sector wage cap and restoring public services to full health. To rebalance the economy the TUC calls for the development of an industrial strategy – including action on steel, R&D, climate change and state banks.

For a strong and secure economy, the Chancellor must stop ignoring signs of weakness.