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Out of recession – but Government’s fiscal policy continues to hold back growth

The Office for National Statistics has confirmed that the UK economy emerged from recession during the third quarter of 2012. Real GDP increased by 1.0 per cent – its fastest for five years and well above expectations. However, IPPR analysis cautions against taking too rosy a view of the economic situation.

Two special factors need to be taken into account. First, the extra bank holiday in June for the Queen’s Diamond Jubilee may have depressed output by around 0.5 per cent in the second quarter and means that some of this quarter’s higher growth is merely a bounce-back, rather than a real meaningful increase. Second, the ‘Olympics effect’ may have boosted growth by 0.2 per cent in the third quarter.

Underlying growth in the third quarter was, therefore, about 0.3 per cent – a welcome improvement but still below the economy’s potential growth rate. Looking at the longer-term picture, GDP is unchanged in the last year, and has grown by only 0.6 per cent in the last two years.

Tony Dolphin, IPPR Chief Economist, said:

“Weak growth for the past two years can be partly accounted for by the combination of high food and energy prices, which have hit consumers hard, exports falling short of expectations due to the euro crisis and a shortage of credit for small businesses which has led to weak business investment. It is also clear that the Government’s austerity plan has held back growth.

“The outlook is still very uncertain, not least due to the prospect of increases in food and energy prices renewing the squeeze on households. The Chancellor should respond in his autumn statement. Spending on infrastructure gives the biggest boost to the economy in the short-term. George Osborne should announce an immediate increase in infrastructure spending of £15 billion over the next two years to kick-start growth.

“In the medium term, Vince Cable’s Business Bank should be given a wider remit and significant funding – IPPR recommends £40bn – to make a difference. It should provide long-term loans for infrastructure projects, such as railway building, and to small and medium-sized enterprises.”

Notes to Editors

IPPR’s recently published a report – A path back to growth - argues that more effort is required to boost demand in the short-term and to ensure that the economy’s growth potential is supported in the medium-term. It says that a path back to growth will require a change in fiscal policy, but on its own this will not be sufficient. This report is available at: http://bit.ly/IPPR9438

In the report, IPPR also argues for reforms to address long-standing weaknesses in the UK economy: underinvestment, vulnerability to external shocks, a poor export performance and persistent inequalities. The report argues that the path back to growth should also be a path to a different kind of British capitalism.

IPPR’s report recommends a roadmap for growth with six elements:

  1. An increase in the scale of quantitative easing
  2. Fiscal measures to boost growth in the short-term combined with a reaffirmation of the plan to eliminate the deficit in the medium-term
  3. Additional infrastructure spending
  4. Measures to make household debt restructuring easier
  5. Measures to keep the long-term unemployed in touch with the labour market
  6. An active industrial policy

The report says Government ministers have called the business environment favourable and accused companies of whingeing about government policy when they should be investing their cash piles but, from a business perspective, the outlook is decidedly uncertain and this is a major deterrent to making long-term plans and spending money. The report argues that policy needs to be oriented towards reducing uncertainty.

IPPR’s report, Investing for the future: Why we need a British Investment Bank, is available to download at http://ippr.org/publication/55/9635/investing-for-the-future-why-we-need-a-british-investment-bank

Contact

Richard Darlington, 07525 481 602, r.darlington@ippr.org

Mavis McKenzie-Cecil, 07929 132 716, m.mckenzie-cecil@ippr.org

 


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