Chancellor's 'march of the makers' has come to a shuddering halt and now looks more like the retreat from Moscow
The political script had been given its big rewrite by the autumn statement's admission that the deficit would not be eradicated by the end of the parliament, but Wednesday's announcement of a return to negative growth in the fourth quarter of 2011 was also not part of George Osborne's plan – and just confirms the recovery is badly off track.
The "march of the makers" (growth led by manufacturing) which Osborne proclaimed a year ago has come to a shuddering halt, and now looks more like the retreat from Moscow.
The only factor even more off track is the psephology. Polls showing a small to impressive Conservative lead as the economy goes negative was not in anyone's forecast. Yet a clutch of polls this week showed the Conservatives faring well.
Osborne and Cameron wheeled out the two ready-made arguments, or alibis, that have stood them in good stead so far. He said: "We are dealing with their debts built up over the past 10 years," and, "the problem has been made worse by the crisis on our doorstep in Europe". At prime minister's questions yesterday, Cameron added the impact of high energy prices on living standards.
Both men will now be hoping that the relatively small fall in GDP of 0.2% does not presage a further fall in the first quarter of this year, which would denote the official return of recession and represent a blow in itself to economic confidence. The much-maligned Office for Budget Responsibility predicted a small fall in the last quarter, but recovery in 2012. Most would say it is odds-on that the economy will shrink again in this first quarter, creating the first double dip recession since the 1970s.
Treasury sources remain relatively confident that the second half of the year will see substantial growth, largely owing to a resolution of the euro crisis, and an upsurge in the UK export market. But stagnation remains the cloud loitering overhead, and, if the economy sulks its way through 2012 and living standards continue to fall, the polls may shift as voters' patience wears out. In a speech on Thursday, Nick Clegg will even go so far as to describe the squeeze as a national emergency.
But there is no immediate sign that any of the big economic or political actors are going to change their arguments. Rather they appear poised to dig in even deeper. The deficit hawks in the City, the thinktanks and the Tory backbenches have intensified their calls for low spending, labour market deregulation, and a solution to the euro crisis.
Ed Miliband and his shadow chancellor Ed Balls have redoubled their efforts to argue that co-ordinated spending is credible. Miliband added some spice to his attack, describing Cameron as a byword for smug complacency.
Labour was also pointing to the first signs of a crack in the IMF's monolithic support for the coalition's austerity strategy. The coalition has repeatedly cited the IMF in support of its strategy. Yet the IMF's chief economist Olivier Blanchard did call on the UK to consider slowing the speed of cuts in the short term.
He told the BBC: " If the economy is doing worse, let the automatic stabilisers work for example, which is the case in the UK, which is partly the case in Germany as well. You can even go further than that, if growth is really dismal then you may decide that you're going to go a bit more slowly about the discretionary part of the budget and for the UK there's some indication that this happened with respect to the revision in potential output, yes to the extent that these countries are not under the gun from the markets, have plausible medium term plans, they can slow down and it would help."The Labour fear is that it may win the economic argument on austerity, but lose the political one. Hence its new year political course correction. For Labour the hope must be that its efforts to rebalance its message will reap political dividends soon. In a painful shift, it has put a renewed emphasis on the need to get the deficit down in the long term, hoping that it will help electors open their ears to their shorter-term messages on spending and growth.
There were very tentative figures in this week's polling suggesting a small positive shift in attitudes towards Labour on economic trust. Miliband and Balls have taken risks in shifting the message, and are urging their colleagues to recognise it may take the whole of this year for the polling to shift.
It has been bumpy internally: some regional party and union meetings this weekend were said to be very difficult. But Labour will also have to follow through on its rebalanced message – something it has sometimes failed to do.