UK Growth Continues To Slow Sharply

At the beginning of October last year, I set out why the UK economy was about to slow down sharply, despite all of the hype that the Liberal-Tories were coming out with about how their austerity measures had performed an economic miracle.   The extent of the slow down was quickly confirmed. GDP grew by 0.7% in the third quarter of 2014, compared to the 0.9% growth in the second quarter of 2014.  That represented an almost 25% reduction in the rate of growth.  Now according to the ONS growth has slowed sharply again, from that 0.7% figure down to just 0.5%, a reduction in the rate of growth of a further 29%.

The figure could be revised down further in coming weeks, but its clear that the prediction made in October is proving correct.  The year or so of faster growth in the UK, after three years of declining or stagnant growth, was not the product of Liberal-Tory austerity, but despite it.  The Liberal-Tories benefited during that year or so period, from the fact that having sunk the economy so low with their austerity measures, it had to have a sort of dead cat bounce at some point.

The growth when it came did not arise from the kind of restructuring and rebalancing of the economy that the Liberal-Tories had promised would be the result of their austerian economic poison, but came from the old sources of debt fuelled consumption, as people were encouraged by Osborne to take on even more mountains of unsustainable debt, as they were bribed with "Help To Buy", to take on mortgages for massively overpriced properties, that are now beginning to tumble in price, even in London, and as the Liberal-Tories got lucky with one off quirks such as around £7 billion of compensation payments for PPI misselling that found its way into consumers pockets.

But, now house prices are tanking, one demographer who has got a number of market predictions right recently told Moneyweek recently that he saw UK house prices falling by 50%, a fall he said had already begun.  I'm seeing the same thing locally, with large numbers of new housing developments where the builders are reducing prices by around 20%.  Whatever the Liberal-Tories say about rising wages, most people do not see it, and the UK like other economies is now going into the three year economic slow down.

The fourth quarter data has come in even lower than the 0.6% quarter on growth that was the consensus of economists predictions, with output actually down by 1.8% in construction and 0.1% in production, the very areas the Liberal-Tories told us would be the engine of growth as the economy was rebalanced.

The trend for growth is now sharply downwards, as predicted.  The annual growth figure still looks reasonable at 2.6%, but the largest part of that growth came in the earlier part of the year.  At 0.5% quarter on quarter growth, with that rate of growth slowing by around 25% per quarter, the annual rate of growth for 2015 looks likely to be substantially less, and beneath 2%, as the three year cycle is likely to see growth continue to slow until at least the final quarter of the year.  In fact, on this trend, 2015 growth could struggle to exceed 1.5%, way below the government's projections.

With the government already failing to meet its targets on the budget deficit by huge margins, and finding itself having to borrow hundreds of billions more than it planned as a result, the UK could face a similar problem to that of Greece, and other countries.  That is that the cost of reducing the deficit, is to crater the economy itself, and thereby to make the proportion of the deficit to GDP, get ever wider, with a subsequent impossibility of even covering the debt interest.

In Greece, for example, a lot is made of the fact that austerity has reduced the budget deficit significantly, but the cost of that has been to eviscerate the economy itself, causing the ratio of debt to GDP to rise.  Prior to austerity, Greece's debt to GDP ratio was around 110%, now having decimate the economy in order to reduce the deficit, the debt to GDP ratio has risen to around 180%!

The austerian economic experiment, which is really a repetition of failed economic policies and ideological dogma from the 1930's, has once again been a disaster, let alone a failure.  The sooner we follow the example of Syriza, and ditch that policy, in favour of developing a co-ordinated, European wide programme for economic growth and investment the better.