A Cold Economic Snap...

Uncharacteristic humility from Allister Heath in this morning's City AM and it's fair to say yesterday's GDP figures were a sharp return to winter after what had been or had seemed like a relatively benign few weeks. Indeed, the ICM poll from Tuesday's Guardian had also suggested a return of some Liberal Democrat support with the Coalition parties continuing to enjoy the advantage over Labour.

The GDP figure was a real shock though as Allister Heath points out, there was some sign that December had been a particularly poor month. The economy, as we know, is often paradoxical in nature with some sectors doing well as others do badly. As I've pointed out before, for those with mortgages and secure employment, it's not been that bad a recession. Yes, wages have stalled and asset prices have declined a little but it has been a huge opportunity to either pay down personal and household debt. Indeed, the reduction in monthly mortgage interest payments has more than offset real declines in monthly income.

The impact of the VAT and fuel rises on inflation is a concern and the general outlook for inflation remains worrying. It could well be that consumer spending will be suppressed for the first quarter and there's plenty of evidence that while the run-up to Christmas was poor for retailers, the immediate post-Christmas period was much stronger.

The hawks like Allister Heath who wanted to see an immediate rise in interest rates have been silenced for now and I suspect it will be later this year before we see any substantive movement upwards. Those who think we were heading for a double-dip recession have some ammunition but I share the view of those who regard the Q4 2010 figures as bad but not perhaps as bad as the initial estimates. I expect a slight upward revision and for Q1 2011 to show us back in positive growth but possibly suggesting a year-on-year growth rate of 2.5% at best.

Politically, it's been bad for George Osborne and there is just a sense in which, after a torrid six months for the Liberal Democrat side of the Coalition, it is now the Conservatives' turn to feel the heat. The ICM poll rating of 35%, coming on the back of the disappointing Oldham East by-election result, shows that the electorate are looking at those areas for which the Conservatives look primarily responsible. Longer-term, a recovering economy and a reduced deficit are probably the routes to a good 2015 election for BOTH the Coalition partners.

The problem for the Coalition is that they have to listen to the sniping of Ed Balls safe in the knowledge there is no Plan B if the recovery falters. There is plenty of evidence the recovery, while fragile, is ongoing. Some pundits think the spending cuts will have a severely deleterious effect on the economy and clearly the shake out of public sector jobs isn't going to be helpful. The theory has always been that the private sector could pick up the slack and re-employ the ex-public servants. That theory already seems flawed as many of the new private sector jobs being created are not only part-time and on minimum wage but are also being filled by migrants.

The next six months are going to be absolutely critical.