As we move forwards through 2012 we see that in so many countries economic output and growth is proving to be a disappointment. Today I wish to take the opportunity of looking at my own country the UK as it produces its latest Gross Domestic Product figures for the second quarter of 2012. We do not start from a good base as the last two quarters have been negative, with the last quarter of 2011 recording -0.4% and the first quarter of 2012 recording -0.3%. So according to the definition of two quarters of falling output the UK is in recession.
Worse than that in my view is the fact that for the last two years the UK economy has trod water and gone nowhere. The problem with that is that it was supposed to be the period of recovery! If you look at past recessions you see a dip followed by a recovery often a strong one. This time we see a recovery look like it was beginning after 18 months or so but it only lasted a year and then,very unusually fizzled out. Since then we have spent two years flat-lining at a level of economic output around 4% below the previous peak. In essence this has been the rationale behind my argument that we are more in danger of a depression than a recession. When historians review this period they may conclude that the (possible) depression of the 2010s has already started.
The Official Response
We have seen a proliferation of measures recently as what became called plan A -deficit reduction accompanied by expansionary monetary policy- hit the problem that with little or no economic growth it will always struggle. If we look back to forecasts we see that if we go back to the last Labour government we were expected to be growing at 3% a year right now. So we have “lost” 6% of output compared to that in the last two years alone with the obvious implications for tax revenue and spending.
Regular readers will be aware that I am a critic of all the monetary expansion and never expected it to work. But nonetheless we are getting more of it- another £1 billion of Gilt purchases by the Bank of England today alone- as the Bank of England ploughs ahead regardless. We are also getting more and more hints that they are thinking of further base rate cuts. This seems to ignore the obvious fact that if you cut by 4.5% (from 5% to 0.5%) and it does not work what is the likelihood of another 0.25% or 0.5% working?
Actually I have been surprised that the Monetary Policy Committee hasn’t reduced base rates further. The more cynical amongst you might attribute this to the fact that the Bank of England makes a theoretical profit via the fact that it charges for the money for Quantitative Easing at the base rate! So whats 0.5% of £334 billion annualised?
What are the latest numbers?
You might in the famous words of the BBC’s children’s programmes like to make sure you are “sitting comfortably” before you read this.
The chained volume measure of GDP decreased by 0.7 per cent in Q2 2012 compared with Q1 2012
So a bad number but why? In essence it was production
Output of the production industries decreased by 1.3 per cent in Q2 2012 compared with Q1 2012, following a decrease of 0.5 per cent between Q4 2011 and Q1 2012
Since the beginning of 2011 UK production has gone as follows; -0.1%, -1.2%,0,-1.4%, -0.5% and now -1.3%. Some might consider that to be something of a trend.
And in particular our construction sector remains a serious problem
Construction sector output decreased by 5.2 per cent in Q2 2012 compared with Q1 2012, following a decrease of 4.9 per cent between Q4 2011 and Q1 2012
This issue of the construction sector has been a problem for a while now. And I do not entirely mean the falls I mean that there is a lot of confusion and debate over measuring it which has been going on for a year or two. Let me illustrate this by using an “outside” measure so to speak from Eurostat which also measures UK construction output. Using its numbers for the three months to May gives you monthly growth rates of +14%,-18.3% and +6%. If that does not look very reliable to you it does not to me either! And that sums it up.It is clear UK construction output is falling but the amount is very unclear.
Service output is now falling too.
Output of the service industries decreased by 0.1 per cent in Q2 2012 compared with Q1 2012, following an increase of 0.2 per cent between Q4 2011 and Q1 2012.
Okay let us look for some perspective
If we look back over a slightly longer period we see this.
Production output decreased by 3.2 per cent between Q2 2011 and Q2 2012
No wonder we are in trouble with numbers like that. And I guess that you have already figured the worst component.
Construction output decreased by 9.7 per cent between Q2 2011 and Q2 2012
Still something is growing.
The seasonally adjusted index of government & other services increased by 0.3 per cent in Q2 2012, following an increase of 0.3 per cent in the previous quarter
Government & other services increased by 1.3 per cent between Q2 2011 and Q2 2012
So instead of a growing economy and shrinking public sector we have a growing public-sector and a shrinking economy! I guess Plan A and UK austerity need to go into my financial lexicon.
If the UK was in the Euro we would be focusing on this
Our period of flatlining now goes back three years or so. Our real GDP figures were reset at 100 in 2009 and we are now at 101.5. Even worse the latest quarter takes us backwards as we were at 102.2 in the first quarter of 2012. Back to 100 or worse? We cannot rule it out.
What would be reported if we were a Southern European economy right now? Let me give you one implication our government bond prices would be falling rather than rising.
Looking Forwards
The obvious issue is how we can get out of this malaise. The problem is that there are no clear signs that we are doing so. Yesterday we saw lending figures from the British Bankers Association which if you peer under the spin of the press release offer little hope. If we look at mortgage lending in June it was £7.2 billion which is £0.8 billion below the six-monthly average. If we go for mortgage approvals i.e likely future house purchases we see an even worse picture because that at £6.5 billion was some £1.7 billion below the six-monthly average. And of course these are numbers which have already fallen considerably.
As troubling is the pattern of business lending where every sector now has negative growth rates in annual terms. Rather worryingly considering the existing situation lending for construction appears to have taken a further downwards turn. Net lending to non- financial businesses fell by £3.2 billion in June. Anybody remember the promises of Project Merlin?
Comment
When the last set of UK economic growth figures were released I stood out from the crowd (who mostly took the easy route of declaring a technical recession) and expressed my fears that we are in fact in an economic depression.
I am finding it harder to shake off the view that when we look back we will think that yes we were in an economic depression.
Here is a link for the full article.
Since then the evidence has only confirmed me in that view. The fact that we obviously badly need a change of tack was one of the reasons for me applying to join the Monetary Policy Committee when the latest vacancy came up. After all the current policies of low interest-rates and ever more Quantitative Easing are hardly working are they? Their claims that they are look ever more hollow.
I remain of the view that until we reform our banking sector we will not see a genuine economic recovery. Our monetary system is broken and badly needs reform and pumping ever more money into it will not work until we do so. We should have learnt that from Japan’s two lost decades and until we do we run an ever increasing risk of repeating them.
I do not like to just criticise so her are my plans from last September.
Such a strategy would have dealt with matters such as the Liebor scandal. But more importantly would give us a base from where we can start afresh rather than carrying all the deadweight of past failure. Some of what we would find would be unpleasant and nasty but otherwise we run the risk of this. From the Eagles
And I know what’s been on your mind
You’re afraid it’s all been wasted time
And I will finish by pointing out that as ever I have followed my convention of dealing with the numbers as they have been published. That does not mean that I think that they are perfect and my critique of GDP statistics can be found at the article linked too below.
