The response
Usually, the response to going into recession is for the Bank of England to lower interest rates, thus making it cheaper to borrow money and boosting the economy. But these are unusual times; interest rates have yet to rise from the unprecedented lows established after the banking crisis, so there's no wriggle-room there.
Other options available to the government are: more quantitative easing (injecting new money into the economy), a reversal of its austerity programme, or an acceptance another recession is unavoidable.
The big problem with more QE is that it's an inflationary measure and inflation is currently very high. There are some who will seek solace in the convenient fact of high global commodity prices and argue, much as the ONS has with the snow, this if it wasn't for exceptional circumstances beyond our control inflation would be fine and so more QE is acceptable.
It seems politically and practically impossible for the government to reverse its austerity programme, but that won't stop the clamour for it to do just that after this news. Expect to see a lot of Balls in the media this week.
The dogma runs thus: we borrow more to invest more, and the consequent increase in tax receipts from the boosted more than covers the cost of the additional borrowing. The fact that our borrowing is already at a record level and yet the economy is shrinking won't dissuade such Keynesians, they'll just argue we simply haven't borrowed enough to make the plan work.
On that note, there is one bit of good news to come out of the ONS today. Net national borrowing was a mere £16.8 billion last month. This was significantly down on December 2009 and below expectations. Net borrowing for the year to was also down from a year ago, but total national debt rose to £889.1 billion, which is equivalent to 59.3 per cent of GDP.
Until you factor in the bail-outs of RBS and HBoS/Lloyds, that is. For the first time the ONS has also published the figures that account for the bail-outs and they demonstrate the sheer scale of the event. Unadjusted net debt at the end of December 2010 was £2322.7 billion, which amounted to 154.9 percent of GDP.
