Figures released today by the Office for National Statistics (ONS) confirmed what virtually all pundits had been expecting – second quarter growth lower than the previous quarter. GDP growth between April and June fell to just 0.2%, down from 0.5%. This further confirms that the UK economy remains in a perilous state, with little prospect that growth will return to its historic trend rate in the medium term. The ONS cited a number of ‘special events’ associated with the second quarter – namely the additional April Bank holiday to celebrate the Royal Wedding and the after effects of the Japanese earthquake – though it accepted that the precise effect of these events was largely unknown.
This puts further pressure on UK Chancellor, George Osborne, to at the very least, reassess the negative impact of his deficit reduction programme on the real UK economy. Thoughtful reflection, however, is probably all that can be expected from Chancellor Osborne, given that any actual revision of his plan – Plan A – will certainly put at risk the UK’s coveted AAA sovereign credit rating. The ‘unthinkable’ would cost the UK dear – not only because it would threaten the UK’s precious and long-standing ‘safe-haven’ status for overseas investors, but also because interest rates would be driven up, increasing the cost of further borrowing and causing long-term damage to profits, growth and jobs. Mr Osborne’s credibility, and that of the Office of Budget Responsibility (OBR), is also at stake – any movement from Plan A would leave his reputation in tatters, and would expose the Coalition government to considerable political fall-out. Most analysts agree that if third quarter figures are as weak as those announced today, the time for mere reflection may have passed.