The Economist: Don

28th September 2012

The figures, released by the Office for National Statistics Thursday, showed that the UK's gross domestic product (GDP) decreased by 0.4 per cent between the first and second quarter of 2012 – a revision from a previous estimate of a 0.7 and a 0.5 per cent decline respectively.

The revision was good news for a coalition government – particularly Chancellor George Osborne – who has been under increasing pressure from economists to reverse the course of the government's harsh austerity measures designed to cut the budget deficit and the country's national debt.

A 3 percent decline in construction output in the second quarter, however, continued to be the main drag on the economy, although it revised up from the previous estimate of a slump of 3.9 per cent. Industrial production fell 0.7 percent instead of 0.9 percent, and manufacturing output was declined 0.8 percent, a little less than the previous estimate of 0.9 percent.

But while any improvement will no doubt be welcome to the government, "the revised figures are hardly reason to plan another round of street parties," writes the Guardian's Larry Elliot. "The picture is still of an economy that has been flatlining for the past two years, and growth would have been weaker had it not been for firms building up stockpiles of goods."

Similarly, Hugh Pym, the BBC News chief economics correspondent says: "The reality is that the economy seems to be bumping along rather than declining rapidly. But, even if the current third quarter registers an Olympic-fuelled bounceback, it is hard at this stage to discern signs of sustained recovery."

Don't strangle it

So as a second recession looks like its at last coming to an end, an editorial in this Friday's edition of The Economist says the chancellor should resist the urge to make up for lost time:

"This year's budget deficit is likely to be bigger than was forecast in the spring….As a result, Mr Osborne will find it hard to hit one of the two targets he set early in this parliament: that public debt should be falling by the fiscal year 2015-16. He should swallow his pride, and junk this target. Squeezing the economy harder in order to hit it is barmy."

"The chancellor's other deficit-reduction target, which takes account of the business cycle, is much more sensible. He should also try to find room for more infrastructure investment, which boosts economic growth more than other kinds of public spending."

Furthermore, it says, there are other ways of tipping the odds in favour of growth, namely: "The "funding for lending" scheme, launched by the Treasury and the Bank of England in July, offers cheap funding for banks that sustain or increase lending. Its scale and clever design mean it is far more likely to succeed than previous initiatives to spur credit growth. If the recovery falters, a larger dose of this medicine might be a better bet than more QE."


More on Mindful Money:

Nominal GDP targeting will hurt society's most vulnerable

The Financialist: Why you cannot grow and cut the economy at the same time

Who should be in charge of setting Libor?

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