The preliminary figures on UK gross domestic product for the fourth quarter of last year were a shock. Where now is the robust recovery that justified the government’s rapid fiscal retrenchment? In a word, nowhere. It is not just that output fell by 0.5 per cent from the previous quarter. Recovery was always likely to be “choppy”, as Mervyn King, governor of the Bank of England, noted in a significant speech this week. More important is the big picture: in the fourth quarter GDP was 4.4 per cent below where it had been at its latest peak, in the first quarter of 2008; it was the same as in the first quarter of 2006; and it was 8 per cent below the trend line for the last two decades. In short, the economy is very weak indeed.
The decline may be revised away. But it is unlikely. Upward revisions of 0.5 percentage points, or more, between the initial estimate and that made three years later happened only six times between the first quarter of 1993 and the fourth quarter of 2007. On average, the revisions were just 0.1 percentage point. It is highly likely, then, that the fall in GDP will prove real.
Moreover, this decline in an already desperately weak economy occurred not just before fiscal tightening had seriously begun but when both short-term and long-term interest rates were already extremely low. With inflation significantly overshooting its target, the chances that the monetary policy committee would have the courage to undertake further quantitative easing are, alas, negligible. David Cameron, the prime minister, has weighed in among the worriers about the inflationary trends. That was foolish. But it can only add to pressure on the MPC.