It could have been worse. That was the City's reaction to news that the UK economy grew by just 0.2% in the second quarter of 2011.
Given that activity has now pretty much flatlined for the past nine months, that may seem a curious response, but there were reasons for the government to be modestly cheered by the announcement from the Office for National Statistics.
Firstly, some analysts had been expecting an even weaker number for gross domestic product, with some pencilling in a fall in output of 0.2%.
Secondly, David Cameron and George Osborne had done a good job in massaging expectations so that the financial markets were braced for Tuesday's data.
Finally, the ONS believes that a whole range of one-off factors – including the extra bank holiday for the royal wedding and the disruption to industry's supply chains caused by the Japanese tsunami – depressed activity by around 0.5% in the three months to June.
Some of this lost output will, on past experience, be recouped in the third quarter, although probably not all of it.
All that said, there is no real cause for celebration. The UK economy is smaller today than it was in 2006 and is crawling out of the deep pit into which it plunged in 2008 at a snail's pace. There was a 6.4% drop in output over six quarters during 2008 and 2009, and since then gross domestic product has increased by 2.5%. You would have to go back to the 1930s to find an economic recovery so slow and so feeble.
Since the recession ended in the third quarter 2009, growth has averaged 1.5pc annualised – roughly half the normal post-recession recovery rate over the past 200 years,” said George Buckley, Deutsche Bank’s UK economist. “Only Italy and Japan are weaker relative to peak than the UK, where slow growth has been driven by soft consumer spending.”
Ed Balls, the shadow Chancellor, reiterated his call for a temporary VAT cut to stimulate growth, saying: “The economy has effectively flatlined for nine months and this is very bad news for jobs, living standards, business investment and for getting the deficit down. What is even more worrying still is George Osborne’s breathtakingly complacent response to today’s figures. This is a Chancellor who is in total denial.”
The weak quarterly growth number makes it almost certain that the Office for Budget Responsibility will have to downgrade its forecasts for the full year from 1.7pc at its next update this autumn.
The ONS attempted to quantify the one-of effects, but stressed its estimates were “broad brush and illustrative”. The quarter’s “special events” may have had a net downward effect of 0.5pc, it said, with a 0.4pc negative effect on the services sector and a 0.1pc negative effect on the production sector.
ONS chief economist Joe Grice added: “The underlying growth rate was somewhat higher than 0.2pc.” He stressed that there would be a natural “arithmetic” bounce-back in the third quarter as growth normalised, even if none of the lost output is regained.
Manufacturing was hit by the Japanese tsunami as motor vehicle production was hit by disruption to the supply chain. As much as £300m was spent on Olympic tickets – or 0.1pc of GDP – but the activity will not be scored in the accounts until the Olympics start. And April’s unusually warm weather reduced electricity and gas use. In total, the effects contributed to a 1.4pc fall in industrial production.
On the other hand, the extra bank holiday and the weather appeared to contribute to an increase in leisure pursuits – with hotel and restaurants enjoying a boost.
Encouragingly, Britain’s powerhouse services sector, which accounts for three quarters of UK output, continued to deliver – growing 0.5pc despite the one-off effects. The sector was driven by strong business services and finance.
Alan Clarke, Scotia Capital’s chief UK economist, who was predicting 0.3pc contraction in the quarter, said: “We’ve seen a stellar bounce back in services and that’s what rescued us... The figures are a relief rather than a triumph.
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