UK fourth quarter GDP down 0.5 percent, shocking market expectations for continued recovery.
LONDON (AP) — Britain's economy contracted by half a percent in the last three months of 2010, official data showed Tuesday, shocking markets which had expected a continued recovery and causing the pound to slump. Analysts warned that the underlying performance of the British economy had taken a severe hit, casting doubt over the government's plans for sharp spending cuts and tax hikes.
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"At the same time, with tax rises in the first half of 2011 already expected to hit consumer demand, the government is open to accusations of causing a double-dip recession. Plan B may need dusting off."
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Jonathan Loynes, chief European economist at Capital Economics, said the figure was "shockingly bad" and would "raise serious concerns over whether the economy is in a strong enough position to withstand the coming fiscal tightening."
http://www.latimes.com/business/nationworld/wire/sns-ap-eu-britain-economy,0,317887.storyAusterity in a recession (or early post-recession recovery) doesn't work. The UK economy was simply too fragile and growth too unpredictable to handle the heavy burden of increased taxes and reduced government spending. If the US tries this the same thing will happen here too.
Does this mean deficits don't matter? Of course not but there is a time and place for everything. When U-3 is below 7%, the economy has 8 qtrs of sold 3% growth, housing has bottomed, and state/local governments have balanced the books, and jobs report is showing solid 200K+ jobs per month for 4-5 months in a row THEN AND ONLY THEN is it time to tighten.
Now prepare yourself; tightening will be pain for everyone. Taxes on the rich aren't enough. They are a required component but we are looking at tax increases on EVERYONE (with heaviest burden on rich) AND cutting spending. It isn't an either or situation. It is an all of the above. However goal #1 is to get the economy into a self sustaining role FIRST. Partisan politics in UK caused them to ignore that risk and now they risk a double dip.