What Recovery?

(Guardian) – Alistair Darling’s insistence that the economy would still be stuck in recession without a leg-up from the Treasury was boosted today by news that public spending and the car scrappage scheme had been essential to generating a recovery in the final quarter of 2009.

While GDP growth at the end of last year was a better than expected 0.4%, according to the Office for National Statistics – up from its previous estimate of 0.3% – analysts said the detailed new figures revealed that taxpayers’ support had been critical in generating the first quarter of expansion since spring 2008.

"The two sources of growth were government consumption, which will come under pressure after the election, and the household sector," said Danny Gabay, of the City consultancy Fathom. And while household spending expanded by a healthy looking 0.4% in the fourth quarter, much of that appeared to be due to the car scrappage scheme, which is about to end. When spending on transport was excluded, Gabay pointed out, household spending did not grow at all.

Graham Turner, of GFC Economics, said: "The breakdown of the GDP numbers highlights the precarious nature of the UK recovery, with many areas of consumer spending still under pressure, and the economy critically dependent on government support."

At last week’s budget, and in his televised debate with his Conservative and Liberal Democrat shadows George Osborne and Vince Cable on Monday night, the chancellor tried to make the government’s role in securing the fledgling recovery a sharp dividing line with the other parties, and today’s data lent support to that view.

However, although the fourth quarter showed stronger growth than first thought, the ONS painted a picture of an economy that remained dangerously fragile, and at risk of a "double dip" – a return to contraction – in the first quarter of 2010. That news would come in late April, deep into an election campaign, shattering Darling’s claim that the worst is over.

The shadow business secretary, Ken Clarke, seized on the news that despite hopes of an export-led bounce in the economy, the trade deficit actually worsened in the final quarter.

"The economic recovery will have to come from exports. But Britain’s trade gap has widened to £21bn, despite a weak sterling," he said. "We need a more balanced economy based on investment and exports to ensure sustainable growth."

Labour’s election strategists will also have been alarmed that workers’ pay declined last year, by 0.5% — the first fall on record, underlining the heavy toll the crash has taken on the public’s finances, and raising doubts about the prospects of the "feel good factor" returning before voters go to the polls.

Many consumers responded by paying off some of their debts, and setting aside more money for a rainy day. The household savings ratio was 7% over the year as a whole – more than four times the 1.5% seen in 2008, when shoppers were still happily increasing their debts to pay for a home makeover or a holiday.

There was also evidence of the considerable impact of the Bank of England’s unprecedented rate cuts in helping consumers to offset the fall in their incomes. In total, interest payments by households fell by £26bn over the year; though that was partly offset by an £18bn decline in the interest received by savers on their deposits.