I pessimistically plumped 0.2% growth for the fourth quarter of this year, in a quick tweet this morning. Looks like I was optimistic. The economy shrank by 0.5% in the last quarter of 2010. The largest declines were in construction and services, but there was one notable success. Manufacturing put in a strong performance and stopped a bad quarter from being worse.
Lenin takes particular glee in pointing out the contradictions of blaming the weather for specific sectoral shrinkages. Chris Dillow sardonically notes that “It seems that the roads were clear enough for people to get to factories, but not to offices.” I hate to point it out, but geography matters, it can help explain why North America got rich and South America got poor.
Likewise it can explain why some workers got to work and some workers did not.
The whole UK was badly hit in December, but the south east was particularly badly hit, London especially so. London is the UK region with the smallest percentage of its population in manufacturing and one of the highest in services.
The West and East Midlands are still where many of the UK’s manufacturers are based were affected by the snow, but not to the same degree as London with its service sector workers. The only way to find out if factory workers are more likely to turn up than office workers is to look at regions which experienced the same weather.
That said, the numbers are still terrible, and the poor numbers are definitely not just about poor weather. Duncan has some interesting preliminary thoughts.
The announcement of Tory cuts should be enough to depress demand as people adjust how well off they predict to be in the coming years and act accordingly. This, coupled with increased food and petrol prices, has done a lot to depress demand and produce the poor numbers we have seen.
Osborne seems to have forgetten or never learned any Keynes whatsoever, even the snappy bits. When the facts change Keynes changed his mind, when the facts change George refuses to be “blown off course.”
The central bank seems likely to shun further stimulus while inflation remains high and people argue the time for tightening is now to prevent a further rise in inflation expectations. Expectations can probably change if inflation remains higher even where the factors pushing inflation higher are transitory, like VAT rises, or out of the banks control, rising international food and petrol prices.
In short, even with high headline inflation there still seems to be a deficiency of demand in the economy and there seems little prospect of this being remedied soon. No matter what the weather last year or next, we are in for a stormy ride.