UK Falls into Double Dip Recession and Austerity Gets Another Test

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The UK Office of National Statistics announced today that first-quarter 2012 GDP dropped by 0.2%. That is not much, but it comes on the back of a drop in the final quarter of last year. That means, based on traditional definitions, the United Kingdom has joined much of Europe in a new economic downturn.

The effects of the news may be largely psychological. The 0.2% figures could be revised back to a flat line or even a slight gain next month. But the news from the eurozone is that Spain already has fallen into another substantial contraction. Italy’s leader, Mario Monti, said his country also has dropped into recession with contractions in the third and fourth quarter of 2011 and a likely continuation of the trend this year. There is hardly a reason to mention Portugal or Greece.

It would be absurd to say that the UK needs any kind of bailout, as much as it would be to say France needs one. But the trouble in England makes it a less robust trading partner, which will cascade to some extent into Europe.

The UK also will be another testing ground for the austerity vs. stimulus battle. Chancellor of the Exchequer George Osborne’s austerity plans are meant to cut expenses of £123 billion by 2016-17. As the Wall Street Journal pointed out recently,

Previously there hasn’t been more than two consecutive years of spending cuts. Mr. Osborne wants to attempt seven straight years.

More dauntingly, no other developed country has attempted cuts this big during the last 40 years. And no country has had an austerity program that has lasted for more than four consecutive years.

In other words, the range of the plan is colossal.

Analysts’ estimates were that the UK would have grown just enough in the first quarter to avoid the double dip. If that had happened, there would have been a shred of facts to support the idea that expense cuts do not have to be regressive, and that stimulus plans are not useful compared to paring the budget to bring down deficits. Taken together a little GDP growth plus carefully engineered reductions in the government spending would have demonstrated, at least temporarily, that the UK and Germany view of the economic world has real-world support.

But the support for austerity has eroded country by country. The UK is the world’s seventh-largest economy by GDP. If it is a test case, the proof that austerity is a way out of debt is wrong.

Douglas A. McIntyre