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The trampoline is missing some of its springs. Far from bouncing back, the UK economy is shrinking at its fastest pace in 30 years. First-quarter gross domestic product figures released on Friday mean that Alistair Darling’s Budget forecast of a 3.5 per cent contraction this year, barely two days old, does not seem to have survived even its first contact with reality.
GDP fell by 1.9 per cent quarter on quarter in the first three months of the year. This is a sharper contraction than the 1.6 per cent fall in the last quarter of 2008 and significantly weaker than the consensus forecast of a 1.5 per cent drop.
For Treasury greenshooters, counting on the famous “second derivative of growth” turning positive, this is disappointing news. For Mr Darling to hit his growth target for the year requires the rate of contraction to decelerate fast, with output potentially having to shrink by just 1 per cent in the second quarter, half that in the third and then needing to stabilise altogether in the fourth. Good luck. It is easier to imagine Mr Darling missing his target by a full percentage point, with potentially ugly results for borrowing forecasts. Frightening though they were, the chancellor’s projections for gilt issuance already look optimistic.
That the market reaction has been relatively calm so far – a 20 basis point rise in 10-year gilt yields – is in itself an indictment of the government’s standing. Investors had little trust in the government’s forecasts to begin with, reflecting the sudden end to the 12-year love affair between New Labour and the City. Budget measures to “soak the rich”, epitomised by the new 50 per cent income tax band, will do little to generate sustainable government revenues. But they have convinced many in the City of two things. The sooner Gordon Brown leaves Downing Street the better for them personally, and for government credibility in capital markets.
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