How spending cuts delivered the double dip

Today’s updated construction figures for the first quarter of 2012 from the Office for National Statistics are disappointing.

Despite the claims of many City analysts that last month’s estimates of 3 per cent fall would be revised up, they’ve actually been revised down by the ONS today. The ONS now thinks the sector shrank by 4.8 per cent over the three months.

And if you dig into the entrails of the ONS release there’s an interesting public/private divergence going on (click to see full table):

New public housing construction over the three months is down 10.9 per cent, driven by deep cuts to councils’ house building grants from central government. Private housing construction, however, was actually up 1.3 per cent.

Infrastructure construction is down a whopping 15.9 per cent. Now, the ONS doesn’t split this into public and private, but the majority of big projects are commissioned by government, so that reflects state spending cuts too.

This chart illustrates the divergence:

Private sector construction is clearly pretty weak by historic standards. But public sector construction is weaker still.

Construction was what dragged GDP into negative territory in the first quarter. If you strip out the sector – which makes up around 8 per cent of output – the economy would have been flat since the ONS estimates that the massive services sector grew by 0.1 per cent over the three months (see page 7 of the ONS first estimate of GDP). And, of course, the fall in GDP in Q1 was what delivered the technical recession and the double dip.

This raises the possibility that, if the Government had cut less on infrastructure and public housing, other things being equal, construction would not have fallen by the same degree*, GDP growth in the first quarter would have been 0, and Britain would not now be in a double dip recession.

* Using the above table I calculate that if new public housing, infrastructure and public new work had remained flat over the three months construction output would have been £26,454m, rather than £25,622m. This would imply a 1.7% fall, rather than a 4.8% drop. A 4.8% drop knocked 0.2% off total GDP, according to the ONS. So a 1.7% drop would have knocked off a percentage of GDP statistically insignificant from zero.

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• AndyB1963

  Where are your export to EU countries figures coming from? I have read that ONS figures show that they rose by an impressive 8%, somewhat debunking the claims of those who would blame the Eurozone for our lack of economic growth. Keep on spinning Andrew?

• indiaisone

  Yes – but the bundle is quite expensive- plus one has to switch from other providers – and can be quite expensive too. 

  I wonder why Francis Maude did not suggest him moving to BT?
  Ps- you are not a BT shareholder by the way?

• HJ777

  My bundle is as cheap as chips. I suggest you look online.

  BT aren’t the only provider that offers this deal.

  No, I’m not a BT shareholder, but I am self employed and use the inclusive package all day long, so I get very good value out of it.

• HJ777

  A fair interpretation, nonetheless.

• andyholmes

  Read what I said and examine ALL of it, not just the cherry picked figures that tend to confirm your own opinion, Ben Chu style.

  Up until last month, (to syncronise quarterly growth figures with export figures) EU exports rose by around 6.5% YoY, BUT non EU exports rose by nearly 14%. Before the resurrection of the Eurozone crisis, EU and non EU exports were rising in tandem.
  The reduction in the rise of EU exports, compared to non EU exports is due to the reduction in EU demand as their economies slowed last year, as well as the strengthening of Sterling against the Euro, making those exports more expensive.  

  “Other things being equal”, if EU exports had continued their trend of rising in line with non EU exports over the last year, GDP would have been around 1% higher, and we wouldn’t have fallen back into recession.

• HJ777

  What he is saying is that exports have risen (the fall in the pound will have been a major factor) but EU exports have risen far more slowly than exports to non-EU countries. This will be due to the Eurozone difficulties.

  I don’t know whether his figures are correct, but presumably he is saying that the under-performance of EU exports has cost us 1% of GDP.

  It’s plausible, although I don’t know the actual figures.

• HJ777

  Remember that the central claim of Labour (specifically Ed Balls) is that higher public spending would generate more revenue by reducing unemployment.

  Well, the government has spent more, and unemployment – and the cost of unemployment – has risen. This rather undermines Balls’s argument.

• andyholmes

   Where was the Keynesian effect of the £200bn borrowed as stimulus spending in our economy between 2002 and 2007 ?
  The total value of growth in our whole economy (private sector, and public sector, both tax funded and borrowed combined) over that period, was less than that.