GDP figures confirm economy is stagnating

The second estimate of Q2 GDP growth released today confirms that the economy expanded by just 0.2 per cent. This means annual growth is down to just 0.8 per cent and the economy has grown by only 0.2 per cent over the last three quarters.

There are multiple causes of this slowdown in growth, including:

• The high food and energy prices that are squeezing households’ spending power;

• January’s increase in VAT;

• The government’s public spending cuts;

• Weaker demand for UK exports as a result of turmoil in the eurozone; and

• Low business confidence and a consequent reluctance to borrow, invest and hire new staff.

There is little to suggest the third quarter will be any better. Consumer and business confidence remains depressed. Retailers report little sales growth. Unemployment is increasing again. And there are more increases in gas and electricity prices to come, which will squeeze households’ spending power even further.

This is not yet a double-dip recession, but it is almighty close to one. The chancellor’s gamble that fiscal consolidation and low interest rates would lead to a vibrant recovery led by the private sector is clearly not working. The time has come for a change of course.

The fiscal plans should be revised to allow the deficit to be eliminated over a longer time period. More immediately, the chancellor should announce an easing of this year’s fiscal squeeze through a tax cut targeted at those on low incomes or an increase in capital spending that would support the beleaguered construction industry, improve the country’s infrastructure and create much needed jobs.

The Monetary Policy Committee also needs to do its part. At its next meeting it should increase the scale of quantitative easing by £50 billion and plan a further £50 billion increase if things do not get better in coming months.

Not all of the causes of the current economic weakness could have been predicted or are under UK policymakers’ control - but that is no reason for inaction. Without growth, the economy cannot hope to tackle its two major problems: high unemployment and the budget deficit. The private sector is not delivering the growth that the government hoped it would. Now is the time for policymakers to act to support it.