The real significance of the news that GDP is shrinking is confirmation of the damage austerity measures are doing to the economy
Here is one mark of the economy's fragility: even the reliably bullish prime minister could not feign surprise at Wednesday's news that GDP is actually shrinking. After all, it follows many months of grim surveys of businesses and consumers, rising unemployment and quarters of flatlining output. A couple of months ago, the government's own office for budget responsibility put the chances of a recession this year at one in three; private-sector economists are even more pessimistic. The real significance of Wednesday's report that national income fell 0.2% in the last three months of last year – the first drop since the snowy winter of 2010 – is more political than economic: it is clear confirmation of the damage done to the economy by the government's austerity programme. As an estimate, it may be revised up or down but George Osborne must already be girding himself to be the chancellor who ushered in a 30s-style, double-dip recession.
After the deepest crisis since the second world war, this was always going to be a long haul. As Mervyn King projected earlier this week, the return to health after a gigantic credit bubble might be expected to be arduous, long and uneven. Indeed, we could go further: according to figures collected by the respected National Institute thinktank, this is the weakest recovery in modern British history – worse even than the Great Depression.
Under attack from an unusually punchy Ed Miliband, on Wednesday David Cameron tried to pin the blame for the contraction on factors beyond his control. It was high inflation, he said. Labour's mismanagement of the economy (an alibi that has worn rather thin after two years of constant use). The euro meltdown. And certainly the eurozone crisis plays a central role in explaining Britain's own slowdown. But so too does government policy. When Mr Osborne moved into Number 11, he inherited an economy that had weathered a massive slump in 2008-09 and was growing at more than 1% a quarter. Thanks to the chancellor's constant talking down of the economy and his juvenile comparisons with Greece, last year's VAT hike and the massive lay-offs of public-sector workers (with many hundreds of thousands still to lose their jobs), the UK economy was heading south well before the euro drama last summer.
Moreover, none of Mr Osborne's bets on where a recovery might come from have paid off. There was his insistence that the private sector would naturally pick up where the public sector left off. Then the hope that the weak pound would prompt an export-led recovery amid a global slump. The insistence on supply-side reforms. Then the lifeline chucked his way by Mr King and the Bank of England, in the form of another £75bn of quantitative easing. Some of these measures may have partly offset the effects of the government's own historic spending cuts; but they certainly have not paved the way for anything that might honestly be termed a recovery, let alone a rebalancing of the economy. Indeed, a net total of 395,000 manufacturing jobs have been lost since the recession: so much for the march of the makers.
From here, Mr Cameron has two options. He can hope for a continuation of the lull in the euro drama, and that the Bank of England do another round of QE. Mr King has already dropped a heavy hint that he may intervene again – perhaps as soon as next month. Going by the comments of Angela Merkel yesterday on Wednesday about the dire outlook for Greece, however, only the foolhardy would bet that the euro crisis is over. The other option is to listen to the IMF's urging this week on countries to use their "fiscal space" and boost their economies. In the March budget, the government could announce some serious measures to boost the economy. Cutting national insurance contributions to encourage firms to hire more young workers would be a start – especially if allied to measures directing QE money into building social housing. Economically feasible? Yes. Politically comfortable? No. But then neither is a double-dip recession.