Ian McConnell: Reality check for believers in Tory economic fairytale

Many people who have followed the ruling Conservatives’ outpourings on the economy for more than a decade now, and compared them to the reality, would obviously have taken the words of Mr Sunak and Lord Frost with a pinch of salt.

There has, after all, tended to be a yawning gulf over this period between the words of politicians and the cold, objective numbers on the economy.

And Brexit has made the economy even more of a hot political topic as the Tories have tried to claim this mammoth folly is somehow a good idea and keep on side the Leave camp which swept Boris Johnson to victory in the December 2019 General Election.

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Mr Sunak declared on October 27: “Today’s Budget delivers a stronger economy for the British people: stronger growth, with the UK recovering faster than our major competitors.”

Seeing as the Chancellor seems so keen to compare the UK with its international “competitors” in terms of its recovery, he should perhaps take a good look at the situation in the third quarter.

UK gross domestic product figures for the July to September period were released last week, a little more than a fortnight after Mr Sunak’s Budget.

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And they look like a cause for concern for the Johnson administration, rather than a matter for celebration. That said, this is a UK Government that looks like it does not worry very much at all about anything, not least about the detrimental consequences of poor decisions, notably Brexit (the impact of which is now plain for all to see) but also the impending national insurance increases.

Surely a key measure of progress or otherwise when it comes to assessing the UK’s recovery from the fall-out from the coronavirus crisis is how far adrift of pre-pandemic levels of output the country is, and how this compares with other major economies.

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The GDP data from the Office for National Statistics showed UK growth slowed sharply in the third quarter to 1.3 per cent, from 5.5% in the prior three months, with output 2.1% adrift of pre-pandemic levels. This compares with France’s lag of only 0.1%, something which might dent some Brexiters’ pride given their desire for one-upmanship over our European neighbours, and is a very big shortfall relative to other major economies.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, tweeted in the wake of the GDP data: “The UK economy has reclaimed its status as the G7’s laggard. Q3 GDP was 2.1% below its Q4 19 level, whereas it was 1.4% above in the US and only 0.1% below in France...”

The House of Commons Library published a research note last week showing Italy was in the third quarter only 1.4% below its pre-pandemic peak in output, with Germany and Canada, respectively, 1.1% and 1.5% adrift.

Last week, Mr Tombs noted Japan had at that stage yet to publish third-quarter GDP data but pointed out the major East Asian nation had seen a smaller shortfall than the UK, compared with pre-pandemic levels, in the second quarter.

Japan’s economy contracted more sharply than expected in the third quarter, according to data published this week.

However, that does not change the reality that the UK’s showing in the G7 league table is dismal.

So Mr Sunak’s confident proclamation only last month about “the UK recovering faster than our major competitors” sounds most incongruous.

Mr Sunak highlighted the Office for Budget Responsibility’s (OBR’s) raising of its forecast for UK growth this year from 4% to 6.5% in his Budget, as he waxed lyrical on the topic of what a wonderful job the Conservatives believed they had done, ahead of last week’s disappointing GDP figures.

We should remember there was a near-10% drop in UK GDP last year, as the coronavirus pandemic took hold. And Mr Sunak did not flag the fact that the OBR’s latest 6% growth projection for 2022 represents a downgrade of this independent body’s projection of expansion next year, from 7.3% back in March.

The OBR’s growth forecast for 2023 has been revised up from 1.7% to 2.1%. However, projected expansion in 2024 has been reduced from 1.6% to just 1.3%. And sub-2% per annum expansion is expected to continue in 2025 and 2026, with the OBR’s respective growth forecasts for these years being 1.6% and 1.7%.

This is most certainly not a backdrop that warrants the rambunctious thumping of tubs in celebration of UK economic strength.

The Conservatives have looked often during the pandemic to have taken the view that the pace of recovery depends entirely on the degree of coronavirus-related restrictions, and have at times jumped the gun on easing, notably last year.

Lord Frost appeared to even attempt to link the Tories’ desire to open the economy up to the greatest extent amid the pandemic to philosophy around Brexit.

In his speech in Lisbon last month, during which he once again banged the Brexit drum, Lord Frost said: “We recognise that zero risk systems are a myth and in fact sometimes totemise particular aspects of broad societal challenges.

“So on Covid, there is a balance between opening up and managing the health burden, and we have now made a set of choices now, which I believe we can and must stick to, which recognise the risks to society of not opening up. Indeed arguably Britain, or at least England, is now the free-est country in Europe in this respect.”

If the Tories do believe that the loosest restrictions mean the fastest recovery, they should take a look at last week’s GDP statistics and how far adrift the UK is of pre-pandemic levels of output relative to France, Germany and Italy.

What the Johnson administration seems to have lacked all along is an awareness that smooth handling of the pandemic, and consistent messaging is important, as is the guarantee that support will continue as long as is needed.

What happened in autumn last year was an extraordinary shambles. Mr Sunak insisted the coronavirus job retention scheme would not be extended beyond October 31, 2020. Then, as the second wave built as it should have been obvious from summer 2020 that it would do, he had to perform a complete U-turn. Time and again during the earlier stages of the pandemic, before vaccine development success and mass roll-out, the Tories were viewed as being too tardy in implementing restrictions. Such decisions are obviously crucial from a public health perspective, but getting them wrong is also a drag on the economy.

We also need to look at other major drags on the UK economy.

Boris Johnson and co. have tried to paint a picture of the UK as a resurgent trading nation, when what is occurring is quite the opposite.

So it should have been no surprise at all to anyone with even a slight ability to see things for themselves (without having their heads turned by political spin) that, for all the Conservatives’ big talk, international trade was a major drag on UK growth in the third quarter. Exports fell and and imports rose. And the UK’s trade balance fell to a deficit of 1.2% of GDP in the third quarter, with net trade detracting from quarterly growth, the ONS figures show.

This is a reality starkly at odds to that presented loudly by the Johnson administration.