The truth is that a revision from minus 0.7 to minus 0.5 – the result of pencilling in slightly less awful construction numbers – leaves the UK economy exactly where it was: stagnating. We’ve now had three successive quarters of negative growth. This is not a blip.
The week brought other news that confirms the economy has flatlined. Tax receipts in July (when firms pay corporation tax) were way down, turning a Treasury surplus for the month in 2011 of £2.8 billion, into £600 million of net borrowing this year.
Chancellor George Osborne had bet on a strong recovery by now, with rising tax revenues to meet his debt reduction target. Now he might have to borrow £30bn more than last year. That could see the UK lose its Triple-A credit rating.
Osborne (and, to be frank, everyone else) was also banking on an export boom.
Unfortunately, the dramatic news this summer is that global trade is contracting at its fastest since the dark days of the credit crunch in 2008.
The eye of the storm is Asia, which kept the global economy afloat in 2009. The Chinese authorities have spent the summer trying – and failing miserably – to get their economy back to growth.
With the eurozone also headed for recession, there is nowhere to sell British exports. Even if they were cost competitive, which they are not because firms held on to labour in anticipation of Osborne’s phantom upturn.
That suggests a frightening option: a big upturn in unemployment in the New Year.
This leaves Osborne with no option but to crank up domestic demand. This will probably come in the March 2013 Budget, or if he’s lucky, in the wake of Greece exiting the euro, so the Chancellor can blame Europe.
The big policy question for the rest of 2012 is this: should Osborne go for tax cuts or more public spending?
In the blue corner is Tory maverick John Redwood, whose blog is always worth a read. Redwood is punting tax cuts, like Paul Ryan the Republican VP candidate.
The Lib Dems in the Coalition want more infrastructure spending, which is slow to bite. On past performance, Osborne will give us a bit of both, blunting the impact.
Eurocrisis may decide the fate of Aviva
AVIVA, the sixth-largest insurance group in the world, is to axe 800 jobs in the UK as part of a £400 million cost-cutting programme. This is hardly unexpected. Aviva’s share price has plummeted by a third over the past 12 months, and its chief executive, Andrew Moss, was booted out in May after 54 per cent of shareholders voted to reject senior management pay increases.
Aviva is the trendy new name for what some of us remember as the amalgamation of Norwich Union, Commercial Union and General Accident (of Perth). With that pedigree and around 43 million customers worldwide, Aviva should be a winner.
But the company became an octopus, with tentacles in a maze of different markets, in 21 countries. As a result, according to new its new boss, John McFarlane, Aviva is “bureaucratic and inefficient”. Cue major restructuring and the removal of four of the nine – yes nine – management layers.
It is still too early to tell if McFarlane’s open heart surgery will save the patient. Aviva reported first-half losses of £456 million this month after absorbing a £876 million write-down of its US operation (the commercial graveyard of many British companies).
McFarlane’s biggest headache is Aviva’s over-exposure in the eurozone, especially in Spain and Italy. Aviva’s shares go up and down with confidence that the euro debt crisis can be resolved. They went up at the start of August, when Europe went on holiday and Mario Draghi at the European Central Bank promised to “do everything” to bail out Spain and Italy.
But the August hols are over. Germany’s Angela Merkel and France’s Francois Hollande are stonewalling an appeal from Greece for more time to get reduce its deficit. We could be in the end game of the eurocrisis.
McFarlane does not have much time to shelter Aviva from the storm.