Pain for Osborne, relief for Balls as GDP shocks us all

For George Osborne, today's abysmal economic figures - 0.5 per cent shrinkage in the last quarter of 2010 - are the perfect storm. Back in October when the Chancellor delivered his belt-tightening, budget-slashing austerity budget, not even Labour expected the economy to stall.

Yet we now know that, even before any of the tax rises and spending cuts Osborne outlined then had come into effect, growth was falling to zero and below.
 
To be fair to the Chancellor, he has been unlucky. He cannot be held responsible for the rapid rise in energy, food and commodity prices that are making life even tougher than expected for consumers.

Given the low level of pay increases, these will almost certainly turn out to have contributed even more to the shock drop in economic activity than December's blizzards.

But for a Chancellor, bad luck is never a good excuse, particularly when you face an opponent as ferocious as his shadow, Ed Balls. Almost alone, Balls has consistently warned about the dangers of a double dip.

Ironically, Balls may not be the only person feeling relief at today's figures. Over at the Bank of England, Mervyn King has been widely criticised for failing to raise interest rates to curb prices. In the light of today's news, his argument that the economy was still too weak to bear increased borrowing costs looks vindicated.
 
If there is a silver lining in the gathering economic clouds it is that, at least for the next few months, interest rates look set to stay on hold. For Osborne that will be some small consolation. But it will not be enough to answer the bigger question: if things were that bad back in October when the coalition outlined its austerity measures, how will the economy cope when they really begin to bite?

All along, ministers have been adamant that they have no Plan B, so the only answer the Chancellor can plausibly give is that we have no alternative but to tough it out. To say anything else would be to invite the wrath of the bond markets which could prove fatal, politically as well as financially.

Today's figures will have been just as big a shock to the Treasury and Number 10 as they were to the rest of us. Whatever they may say in public, it would be surprising if in private they are not hurriedly looking at how Plan A could be scaled back, should growth fail to recover as the year unfolds. ·