THE UK economy has, unexpectedly, slipped back into recession for the second time in recent years. A recession occurs when economic activity declines for two successive quarters, which last happened in 2008 under a Labour government. The Conservative-led coalition had hoped to avoid a “double-dip recession”, where the economy shrinks a second time following a weak initial recovery. But, since October, the UK economy has contracted. And the sharp fall in the construction sector in the three months to March has now helped to tip the economy into recession.
This reversal for the economy is also a major setback for prime minister David Cameron and his government. The coalition has pursued a tough austerity programme to achieve rapid deficit reduction, while relying on export growth and investment spending to maintain overall economic growth. In addition, the Bank of England has engaged in quantitative easing – printing money – to try and stimulate the economy, but without much obvious success. Nevertheless, the government can point to some achievements: its borrowing costs have remained low – despite its large fiscal deficit – while sterling has appreciated in value in recent months.
For the British government, news of the downturn could not have come at a less opportune time. It is already under attack for its budget measures last month, where tax cuts favouring the rich were strongly criticised. The coalition’s difficulty on the economy has given Labour leader Ed Miliband an opportunity to claim the recession was “made by the prime minister and his chancellor in Downing Street”. Labour has argued that the government’s austerity programme, by cutting too far too fast, has depressed an already weak economy.
Confirmation of a double-dip recession is likely to increase tensions between Conservatives and Liberals in coalition on economic policy. Given the state of economic uncertainty, both business and consumers will have little incentive to invest and spend, and so boost the economy.
Nevertheless, for the coalition to perform a policy U-turn on its austerity programme, and to place less emphasis on spending cuts and more on growth, seems unlikely at this stage. It would be seen as a failure of political nerve at a critical point, and a failure of economic strategy. And that would also leave the coalition without a major point of policy difference or distinction with Labour on the most important issue: the economy.