Blog: Brace yourself for the coalition's Terrible Twos

Forget the coalition government's first birthday - after a heady 12 months of gargling and newness it is about to enter the Terrible Twos.

As with all young ventures, Con-Lib progress has come on in fits and starts.

Latest figures show Britain's economy is stagnant, with GDP at Q3 2010 levels after a drop in Q4 was nudged back by a hardly healthy 0.5% rise in the first quarter of this year.

Optimists will say at least the country hasn't slumped back into recession, as feared after the Spending Review last October when the government announced cuts totalling a staggering £81bn.

But 0.5% up is nothing to shout about and the fear has far from subsided, as shown by consumer confidence surveys.

Modest gains in March failed to reverse the downward trend of Nationwide's consumer confidence index, which nose-dived in February to its lowest level since records began in 2004, meaning sentiment was at a lower ebb than during the recession.

Interest rates are predicted to rise between July and February and savers will rejoice when they do, but millions of borrowers will be even less confident about their financial future.

The government's first rough and tumble twelve months has been cushioned somewhat by the public's fervent desire to fix past problems and embrace the newness of the coalition. Year two is set to be more painful as the economic measures enacted by the government filter down from the Treasury to the country.

Unemployment will rise this year and probably next as the full force of the cuts hit the public sector and some parts of private enterprise too. Even if, as the government hopes, the private sector grows to absorb the increased jobless, there will be a significant lag.

Job security fears will cause further angry protests from individuals and suppress consumer demand more broadly. Britain's manufacturers will come under even greater pressure to pick up the slack and bring home the promised export-led recovery on which George Osborne built his savage spending cuts.

In this respect there is some reason to be optimistic - recent figures show the UK's trade deficit has shrunk as exports have continued rising strongly in the past 12 months.

After last quarter's slump the priority for the government was to stop the economic contraction. Now this has been achieved the priority is to ramp-up the speed at which the economy is recovering. The Bank of England will have to time the interest rate rise very carefully to avoid destabilising growth.

Ex-Treasury adviser Roger Bootle this week said the rise will not come until 2013 as the economic recovery remains "pretty weak". Similarly Bank governor Mervyn King dismissed an early rise due to the "sheer volume of debt in the economy".

But the next set of inflation figures will be crucial: if they fall again after last month's 0.4% drop then the Bank will be reluctant to raise rates until at least much later this year.

However, a rise in inflation will put immense pressure on the remaining doves in the MPC to change their approach.

Chancellor George Osborne has so far managed only to haul the crawling UK up off its hands and knees to stand upright. Walking along the still fluctuating economic tightrope will be precarious. The young coalition and the country should prepare for frustration and falls ahead.