A slowing economy is the last thing a chancellor needs going into an election. But that is what the latest figures mean for George Osborne.
A slip from 0.7% growth in the third quarter to 0.5% in the final three months of 2014 matters when the cracks are appearing in a manufacturing sector that is stagnating and a construction industry going into reverse.
Sustained, reliable growth was restricted to the services sector, which we know is expanding with the help of debt-fuelled consumer spending.
And we should remember that while the UK’s national income is higher than it was in 2008, after the longest and slowest recovery from recession in a century, that has been driven by a population that has swollen by around 2.5 million people. Per capita incomes are not expected to recover their pre-crisis peak for another 18 months or two years.
So a slowing economy is bad news for Osborne when he wants to sell the idea that stellar growth is trickling down and raising living standards. For millions of households that simply isn’t true.
There are plenty of economists who argue we should all relax. Stop worrying about the UK. The economy in the year ahead will be underpinned by low oil prices and the likelihood of interest rates remaining at rock bottom, they say. Most employers are also expected to open their wallets and boost wages (at least enough to beat inflation).
They are probably right about 2015. The Bank of England looks ready to delay hiking rates until next year, oil prices will stay low for a while longer and are likely to recover only half the lost ground. Inflation will be below 2% all year.
The problem with this argument is that it shows how dependent growth is on all these extraordinary factors.
What happens when Bank policymakers tighten the credit screw, desperate for a return to something approaching normality?
Construction, which has already shown itself sensitive to a modest restriction on mortgage lending by the banks, will contract even more.
Manufacturers, denied a buoyant export destination across the Channel, will tighten their belts.
Consumers, confronted by higher borrowing costs, will delay plans for home improvements and a new car.
A study by the Resolution Foundation showed many more people live on the edge of a financial cliff than policymakers had previously believed. They number in the millions rather than hundreds of thousands. Then there are the slow productivity gains that make year-on-year inflation-busting pay rises unlikely.
Academics have struggled to pinpoint the reasons for the UK’s lacklustre productivity, but one factor that shines out is low investment.
Figures from the banking industry show companies are hoarding cash. If they are borrowing to invest, it is only in small quantities and not without a huge cushion of reserves to fall back on. It may be sensible for each company to be cautious, but to grow they need others to invest and spend.
The alternative of course is to hire cheap new employees. Judging by the jobs figures, this is the chosen path for most UK business. And then to sweat that labour. Except now they are up against skill shortages and demands for higher pay.
Osborne’s watches and waits in the hope that investment will catch on, almost like a fashion accessory. But the incentive to invest would flow from government playing a bigger role – one where it plans for long term growth.
