Not a particularly good day for George Osborne as he has to face the realities of the voting down of his working tax credits legislation by the House of Lords. At the same time the first estimate for GDP for the third quarter of 2015 suggests a slowdown in growth as activity expanded by 0.5 per cent, below what the markets were forecasting and slower than the 0.7 per cent seen in the previous quarter. This leaves the level of output 2.3 per cent above a year earlier. This is still a fairly buoyant growth rate but notably slower than that seen across all of 2014.
On the face of it this is still growth, though not that spectacular anymore. So what is the worry?
First George Osborne needs to find ways to plug any shortfall in the £12bn welfare cuts he was envisaging as a result of the vote by the Lords. And faster growth would help. That does not seem to be forthcoming. It is not just this past quarter that has been an issue but the outlook for Q4 and beyond. Most forecasters are now downgrading forecasts for this year and next on the back of slower growth in the world economy. Not only in China where the slowdown is leading to considerable reductions in exports to that country from the developed world while also affecting growth in the wider Asia region. We have seen problems in places like Brazil where recession is threatened by the commodity price slump and in Russia where the oil price fall and trade sanctions are impacting not only the Russian economy but also countries like Germany that have traditionally been big sellers to those nations. The eurozone, continues to struggle to contain large deficits and debts with growth weak and deflation re-emerging. The migration crisis and how to fund have reinforced this malaise. Geopolitics—the Ukraine, Syria—and its impacts have not helped. As a result world trade which normally leads a recovery in the global economy is trailing growth at present and the IMF has just downgraded its own world growth forecasts for this year and next.
Of course one quarterly figure alone doesn’t tell the whole story—there are all sorts of one-off factors at play here. Heavy rains in August could have affected the notoriously unreliable construction statistics with construction output falling by 2.2 per cent. Warmer summer weather lasting longer into September probably delayed winter clothes purchases. But it is the figures for manufacturing that are the most worrying. Manufacturing output declined by 0.3 per cent, the third consecutive quarterly fall and has now dropped by around 1 per cent over the past year.
Despite some success stories, such as in car production and exports, the long awaited for rebalancing of the economy towards manufacturing is threatened by a worsening global environment. The plant closures linked to the sharp fall in the world price of steel for example is an extra worry ahead. By contrast service sector output jumped by 0.7 per cent in Q3.
So what is happening? In truth, it is the household sector, as before the financial crisis, that is, in large measure keeping the economy going. A rise at long last in real wages and strong employment growth are contributing to this. But even here sentiment is very fragile. The CEBR/YouGov consumer confidence indicator has been worryingly flat for a good few months now.
The concern for the Chancellor therefore must be that he has to rethink some crucial aspects of his fiscal policy stance against the background of an economic recovery which though ticking along for now may still be on relatively fragile foundations. Certainly employment levels and household spending power are improving domestically. The key threat though on the horizon comes from a cooling global economy over which George Osborne has little control.
