AUSTERITY has outlived its purpose and now poses a threat to UK economic recovery, Danske Banke chief economist Angela McGowan said yesterday.
A day after the latest warning from the International Monetary Fund (IMF) over the severity of Chancellor George Osborne’s debt reduction programme, Ms McGowan said the latest figures showing a worse-than-expected 0.3 per cent fall in gross domestic product (GDP) sent out one clear message.
“The latest GDP figures tell us that ‘Plan A’ is still not working,” she said.
“The latest economic contraction has not come as a surprise.
“This week’s IMF warning to the Chancellor to take his foot off the austerity pedal might have been rejected publicly by Mr Osborne, but privately the Chancellor and the Prime Minister must know that something needs to be done about economic growth before the next election.”
Without some policy changes, she said the country was destined for weak growth of 1.1 per cent this year with the risk of another dip into recessionary territory, two consecutive quarters of contracting GDP, remaining high.
At the same time she said an improving situation in Europe and in the global economy would contribute to a more favourable outlook for the business community in the UK.
Low interest rates and a depreciating pound in 2013 would also lend support to business growth and exports, while the Bank of England’s Funding for Lending Scheme was expected to ease credit conditions and feed through to the real economy despite a slow start.
“The drag on growth will principally come from austerity. For example, the 20 per cent rate of VAT will continue to put pressure on household incomes and spending patterns. In addition, consumer confidence in the UK will struggle if people perceive that government economic policy is choking off growth.”
The fourth-quarter drop is worse than expected, with most economists forecasting a drop of 0.1 per cent.
It deals a blow to recovery hopes after the UK bounced back from the longest double-dip recession since the 1950s in the third quarter.
But the rebound was largely driven by one-off factors, such as the Olympics, and as the economy clawed back activity lost during the Queen’s Diamond Jubilee holiday, which has skewed quarter-on-quarter changes in activity, the ONS said.
The fourth-quarter figures are preliminary estimates and subject to revision.
The latest ONS estimate increases the pressure on Mr Osborne at a time when all three major ratings agencies have the country’s prized AAA status on negative outlook.
A Treasury spokesman said: “The official forecast was that the UK economy would contract in the last quarter of 2012 so this figure is not unexpected. “It confirms what we already knew – that Britain, like many European countries, still faces a very difficult economic situation.
“It underlines what the Chancellor said at the autumn statement and the governor of the Bank of England said this week: while the economy is healing, it is a difficult road.”