The economy: not as bad as feared

Peter KellnerPresident
January 30, 2012, 10:08 AM GMT+0

The economy, we are told, is still bad, and perhaps even getting worse. But, explains Peter Kellner, public opinion on the subject is improving. Why?

Things have not worked out as the Government hoped. Twelve months ago it was predicting steady economic progress. In the event, growth in 2011 was less than 1%, and the economy ended the year slipping backwards. Unemployment, which started last year fairly stable, ended it rising sharply. In last week’s Prime Minister’s Questions, David Cameron had a difficult time defending his record, not least his plans to cut public spending when the economy is weak.

You would guess none of this from the state of public opinion. If anything, people are slightly less gloomy than they were a year ago. Drawing together data from YouGov polls conducted in the last few days for the Sun and Sunday Times, and comparing them with our figures at the start of 2011…

  • The proportion of people expecting their family’s finances to get worse has declined, from 64% to 53%

  • The proportion expecting public spending cuts to have an impact on their own life has fallen from 72% to 62%

  • The number accusing the Government of cutting spending too fast is down from 58% to 48%

  • The proportion saying the cuts are necessary is up from 55 to 60%, while the number saying they are unnecessary is down from 34% to 26%

The point about these figures is not that they tell a tale of optimism: people remain generally pessimistic. It is that the pessimism is not quite as pervasive as it was, even though the economy has been weaker than expected.

This helps to explain why Labour has failed to take a commanding lead in voting intention. True, the Conservative lead I analysed last week has evaporated. The two main parties were level-pegging throughout last week, with each of our five polls putting both Labour and the Conservatives on 38-40%. But, as we approach this Parliament’s mid-term with the economy still struggling, one would expect the main opposition party to hold a double-digit lead.

One big reason why it isn’t is that, despite the rise in unemployment, the Government is winning the argument about the necessity for spending cuts and who should be blamed for them. Compared with last January, there has been no material change in the numbers: almost twice as many voters still pin most blame on Labour rather than the Conservatives

Could the reduction in gloom be deceptive? It takes time for central government and local councils to decide which specific cuts to make, time to implement them, and time for people to notice the reduction or withdrawal of specific services. Perhaps the real extent of the cuts has not fed through to the point where voters feel the pain.

If this is the case, then the position might well be reversed next year – with the economy growing once again but voters’ gloom intensifying. If so, Labour will have a chance to move into a clear lead. But it will still have to pin more of the blame on the Government for the need for sharp spending cuts. Until or unless it does, the economy will continue to be at least as much as a vote-loser for Labour as it is for the Conservatives.

Meanwhile, expect the chattering classes to get worked up three months from now, when the first quarter estimates for economic growth are published. If these show a second successive quarter of contraction, then Britain will 'officially' be in recession again.

In fact, as David Smith points out in the latest Sunday Times, this convention was dreamed up to get Lyndon Johnson out of a political hole. In 1967 America’s president had to deal with a single-quarter dip in output. His economic adviser, Arthur Okun, came up with the wheeze of requiring two quarters of contraction to qualify as a recession. Nobody seems to have questioned this definition since.

I find this odd. Last week’s news was that the economy contracted by 0.2% in the final quarter of last year. Suppose we are told in April that GDP has contracted by a further 0.1% in the first quarter of this year. We shall then be told we are back in recession. Call this scenario A. It could scarcely be worse for the Government, just days before nationwide local elections, including the contests for London’s mayor and assembly.

Now for scenario B. Imagine that the economy had contracted by 0.4% in the fourth quarter of last year, and then stayed the same in the first quarter of this year. In scenario B, the level of GDP would be lower in both quarters than in scenario A. Britain’s economy would be in greater trouble. However, under the two-quarters rule, scenario A counts as recession, while scenario B does not.

Here’s my suggestion for sorting out this nonsense. George Osborne should ask the Office of Budget Responsibility and its excellent director, Robert Chote, to come up with a better definition of recession – one that involves a deeper reduction in GDP than reductions of 0.1% or 0.2%.

For who knows, when the final data have been processed and the final revisions made, in three or four years’ time, we might discover that production hasn’t fallen at all this winter, and that the political argument that could well dominate British politics for the next few months is based on a false premise. Perhaps today’s relatively phlegmatic voters will turn out to have been shrewder than the statisticians and more sensible than the politicians.

See the latest political results, including our Sunday Times polls, here

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