Adam Smith Institute

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Progression to recession

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progression-to-recession

It seems much more than a year ago that Prime Minister Gordon Brown was telling us that the financial crisis had been "created abroad," and that "Britain is best placed of all the major economies" to weather the storm, largely because of "the fundamental strength of our economic position."

Yesterday's provisional figures showed an economic contraction of 0.4 percent in the third quarter, dashing hopes within the government that a marginal, even tiny, expansion would enable them to bellow forth that Britain is now out of recession, and that their astute economic management had achieved this.

Of course the figures may be revised as more numbers come in, but a striking feature is that all the numbers are bad. It is not that one underperforming sector has dragged the average into red territory; it is that none of the numbers rose, with contractions in both services and industrial sectors. The other striking fact is that Britain might be the only major economy still in recession. Britain's "best placed" position now lags behind France, Germany and Japan (officially out of recession), the US (unofficially out of recession) and China (growth rate accelerated to 8.9 percent).

The stock markets have recovered spectacularly from their lows, but the nuts-and-bolts economy has not. Those who might invest to expand and create jobs are not convinced that the misallocation of resources is yet corrected. For years money was pumped into public sector activity, giving an utterly false picture of real demand. Funds that might have been invested where the market indicated real demand were diverted instead into government programmes. For years the Bank of England (and other central banks) created easy credit through low interest rates, again giving false signals about costs and demand. The UK economy became greatly over-extended in some areas, and will need to readjust. To make this even more difficult, a crippling burden of debt now hangs over future generations.

Is there any good news? Perhaps only that the failure of the UK government stands even more exposed. They cannot claim that their billions of pounds of stimulus has saved the day. The latest result increases the likelihood that a new government with more responsible policies will take over. Whether those policies will include reductions in both spending and taxation, and ones directed to clearing the way for economic growth, remains to be seen.

Check out Dr Madsen Pirie's newly-published "101 Great Philosophers".