Triple Dip? Maybe - Triple Crisis? Definitely

If GDP also shrinks in the first quarter of 2013, then the economy will be back in technical recession - the third recession in the space of five years. However, this still remains speculation. We will not know for sure whether the economy is back in recession for another three months.

All the talk is once again of a triple-dip after today's GDP figures for the final quarter of 2012 showed the economy contracted by 0.3%. If GDP also shrinks in the first quarter of 2013, then the economy will be back in technical recession - the third recession in the space of five years.

However, this still remains speculation. We will not know for sure whether the economy is back in recession for another three months. And even then, history suggests there is always a chance that the GDP figures will be revised and that any recession will be subsequently eradicated from the record.

What we do know, however, is that the economy is facing a triple crisis: stagnation, debt and imbalance.

Stagnation because real GDP remains over 3% below its peak level, now five years in the past in the first quarter of 2008; and because over the last year GDP has increased by just 0.1%.

Debt because although household debt has fallen from a peak of 170% of income in 2008 to 150%, it remains at a very high level relative to UK experience prior to 2000 and compared to debt in other advanced economies.

Imbalance because the current account deficit in the first three quarters of 2012 was 3.7% of GDP - on course to be the largest deficit since 1989; and because manufacturing output is now clearly on a declining trend. Hopes of an export-led recovery or a 'march of the makers' have evaporated.

Yet - despite even the IMF now acknowledging that rapid deficit reduction has led to weaker growth - the government persists with its strategy of focusing almost exclusively on cutting its spending, refusing to accept that by taking demand out of the economy it has contributed to stagnation and thereby made it harder for households to reduce debt.

True, the government has announced a series of initiatives to boost growth, from finding money for research into graphene to cutting the rate of corporation tax, but these have proved ineffective. The reason is that, for the most part, they reflect a misdiagnosis of the problem. They focus on improving the supply-side of the economy: its capacity to produce output. But the UK already has plenty of spare capacity.

What the UK lacks is demand to match that capacity. Government spending cuts, slower growth in demand from Europe, the squeeze on households' spending power as a result of inflation running ahead of wage gains and low levels of business confidence have combined to suck demand out of the economy. If the government is not prepared to address this problem directly through extra public spending or tax cuts, which is clearly is not, it is unsurprising that the other measures it has put in place are proving ineffectual.

What is more, the government's efforts to reduce its borrowing are becoming self-defeating. George Osborne has already conceded that he will miss his target for reducing public debt and figures released earlier this week showed, public borrowing in the first nine months of the current fiscal year was £106.5 billion, up from £99 billion in the same period of 2011-12. This is putting the country's AAA credit rating under threat.

It is too much to hope that today's GDP figures will lead to a change of approach from the government; they were after all widely forecast at the time of the Autumn Statement, yet in it George Osborne claimed the UK economy was "healing" and "on the right track." At the moment, that track is leading to an economy that is stagnating, has a larger external imbalance and a household still hamstrung by debt.

But now is the time for a change of path. What is needed is a set of policies that put demand back into the economy in the short-term while beginning to address the long-standing structural weaknesses of the UK economy. As a first step, this should include a temporary cut in employees' national insurance contributions, using the historically low cost of borrowing to increase spending on infrastructure, measures to keep the long-term unemployed in touch with the labour market and an active industrial policy focused specifically on reversing the country's poor export performance.

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