The latest economic figures revealing a shock fall in construction output of more than 1% between April and May this year are alarming, but might be brushed off as an isolated quirk if all the other evidence pointed the other way. But it doesn’t. The construction slowdown is matched by an unexpected slump in factory output as well as a worrying widening of an already bloated trade deficit. The latter reflects the dampening effect on UK exports as the pound has steadily strengthened over the last year, reaching the highest level (£1=$1.7) for 5 years. UK export prospects are further deflated by the way the eurozone is mired in seemingly endless austerity because the major debtor countries – Greece, Portugal, Spain, Italy – cannot while locked inside the single currency achieve the growth necessary to cut their deficits when their debts are still rising. All this makes it unlikely now that the UK will have matched in the second quarter of this year, let alone exceeded as was confidently predicted, the 0.8% growth secured in the first quarter. That suggests that Osborne’s much-trumpeted recovery may already be beginning to fade.
That is not as surprising as it might seem. The upturn in the last year may have seemed rapid, but that was only because of the depth of the hole that Osborne had dug Britain into, not because the foundations had been laid for sustainable growth. Wages continue on average to fall, albeit slowly, but that means internal UK demand remains flat or still sinking. UK productivity is stalled at almost the lowest level in the OECD. Exports (UK external demand) are a slow-motion car crash. And most seriously of all, the investment strike in the private sector continues unabated. When all four of these conditions are in place, no recovery will be long-term.
Construction, some 6% of the whole economy, still remains about 10% below its pre-crisis peak as private house-building has stagnated. It has always been the canary in the mine, whether the harbinger of rapid economic expansion or of imminent slowdown. If at this time the latter, as I believe, it undermines at a crucial point before next May the Tories’ main electoral asset – that Osborne always had a long-term economic plan and it has now come good. All that is needed to clinch that trump is for Labour to broadcast its alternative of ending Tory cuts and using public investment (so long as private investors remain sitting on their hands) to kickstart real sustainable growth, run down the dole queues, and reduce the deficit far faster than austerity ever will.