Surely it's too early to tell on the economy?

The surprise news this week that the initial figures for Q4 2010 showed a 0.5% contraction of the economy caused a lot of comment.

Labour claimed that it proved the government was going in the wrong direction and that the cuts are damaging the economy. The government claimed it showed no such thing and tried to shift much of the blame onto the cold weather (although independent economists calculate that even without the cold snap growth would have been "flattish" (down from 0.6% growth in Q3)).

So who is right? Do the figures prove that the government is heading in the wrong direction and that Labour was right? Or is it a statistical blip that will be ironed out as we forge ahead.

I would suggest neither response has this right. In fact I would suggest it is far too early to decide one way or the other.

Let's look at the facts. The period Q4 runs from October-December 2010. At the start of the quarter the coalition government (AKA Teh ConDems) had been in power for just over 4 months. The CSR was not even announced until 20th October. The way people behave and the decisions they take simply do respond immediately to these anyway. It takes time. If anything it could be argued that people were still largely responding in Q4 to decisions taken earlier in 2010 and even earlier than that. I know new governments love to blame the previous administration and it does get ridiculous (I still remember Labour blaming the Tories for things in 2005 for example) but after only a few months this is surely still legitimate? At the very least it is fair to say that the current administration cannot be solely to blame for economic behaviour towards the end of the year when they only took office in May.

It will be a while before it becomes clear exactly which direction the economy is going in and whether Q4 2010 is a blip or a trend. Michael Portillo said something interesting on This Week on Thursday. He suggested that from his experience, the way the government has reacted and the other economic indicators suggest that they really do believe this is just a blip and even that when the revised Q4 figures come out they will tell a better story. Otherwise, if they really thought we were heading for a double dip they would be forced to act as it would be politically very damaging.

Having said this I return to my main point. We just do not know.

And anyone who claims Q4 2010 is at this point clear evidence one way or the other is being misleading. They don't know either.