First, the bad news. The UK economy shrank by a shocking 0.5 per cent in Q4, confounding City expectations of a rise of up to 0.7 per cent. Cue a big fall in sterling as expectations of an interest rate rise instantly evaporated.
As a miss it was a big one, and commentators are still trying to work out what went wrong. George Osbourne tried to pin the blame on December’s deep freeze (something he did 24 times in a three minute interview yesterday) but, as commentators have been quick to point out, that hardly provides a convincing explanation for such a broad and savage decline in the economy.
Exacerbating the situation is, of course, high inflation, which Mervyn King admitted yesterday will fall in a range of 4-5 per cent over the coming months. As the Times highlighted on its front page today, workers are now facing the sharpest fall in their real wages since the 1920s, which will come as depressing news for a population yet to feel the full force of draconian spending cuts and the rise in VAT.
Still, not everyone is rueing yesterday’s dismal growth numbers. Ed Balls has, in effect, just been handed a large, spike-studded stick with which to beat the Chancellor. Helping him wield it yesterday was Sir Richard Lambert, the CBI’s outgoing director-general, who took the chance in his final week at the CBI to attack the coalition’s austerity plan.
Nevertheless, Balls’ argument that the government needs to implement a Plan B, and quickly, is not one shared by King nor, indeed, by plenty of other experts. Yet Balls is far from alone in, if not actually celebrating economic weakness, hardly viewing it as a complete disaster. The Times’ David Wighton, for instance, says the dismal growth numbers will put paid to expectations of an early rise in interest rates, something he thinks will, in conjunction with the low pound, give the economy a sporting chance of decent growth in the second half of the year.
As yesterday’s shock news proved, predicting economic outcomes is, at times, almost futile. But if – or rather when – CPI hits 4 per cent, there is little doubt we will see renewed warnings about the risks of stagflation, and another round of personal finance stories urging savers and investors to take urgent steps to hedge against inflation. In the current climate, it will, for many people, be advice well worth considering.