George Osborne has plenty on his plate at present. The chancellor is in a fine old mess over tax credits; now the latest evidence is that the economy is coming off the boil as well.
In the short term, it will be digging himself out of the hole over welfare reform that will be causing Osborne the most concern.
Growth has slowed from 0.7% to 0.5%, but the economy is a long way from falling back into recession. What’s more, it is possible that the first stab at calculating output in the three months to September will be revised up by the Office for National Statistics when more data arrives.
All that said, there are three reasons why the growth figures deserve attention.
The first is that the economy has lapsed back into a familiar pattern of having a strong service sector and weak manufacturing. As was the case in the years leading up to the deep recession of 2008-09, the economy is heavily reliant on the City and consumer spending. Factory output has declined for three successive quarters.
This split is not hard to explain. Low interest rates make borrowing for consumption and speculation in financial assets cheap; the strong pound and the slowdown in the global economy make exporting UK made goods expensive and difficult. As things stand, poor quality growth is exacerbating the north-south divide and highlighting the age-old failure of Britain to pay its way in the world.
The second point is that all the signs are that the economy will get worse before it gets better. Recent survey evidence has not only indicated that there is no respite in prospect for manufacturing, but also that the malaise affecting industry is starting to spread to parts of the service sector. Although it is still early days, some analysts, such as Samuel Tombs at Pantheon Macro, are pencilling in growth of 0.3% for the fourth quarter. That would start to set alarm bells off at the Treasury.
The third point is that the slowdown comes at a time when the Bank of England is pondering whether to raise interest rates. Threadneedle Street’s monetary policy committee could decide that rising earnings pose a bigger threat to the economy than weaker activity. If it does push up borrowing costs over the next few months, the Bank will give the economy a clonk on the way down.
