The UK’s economic weakness is now worse than in the 1930-34 Great Depression as we see stagflation continue

I wish today to examine the UK economy as recent data and information have as a minimum challenged the consensus that had built up about it as 2012 has opened. The consensus in the media has been that we have found some solid economic growth and that inflation will soon be in line with the Bank of England’s target of 2% for Consumer Price Inflation. Many articles have treated the latter as a certainty.

Such thoughts if one may describe them as such have involved ignoring the recent strength in the oil price where a barrel of the Brent crude benchmark has risen by 16% in 2012 so far and now stands at US $125.40. As I pointed out in my article of the 24th of February this rise has both inflationary, via cost pressure, and contractionary effects on the UK economy. Perhaps those sure of an inflation fall do not drive and do not have to purchase petrol or diesel at new higher prices.

UK Industrial Production

On Friday we received the latest statistics on this from the Office for National Statistics and the initial headline disappointed somewhat.

The seasonally adjusted Index of Production fell by 0.4 per cent between December 2011 and January 2012

If we look back for a comparison to 2011 then we received a firmer jolt.

The seasonally adjusted Index of Production fell by 3.8 per cent in January 2012 compared with January 2011.

As this point there would have been some outright concern. Month on month numbers can be erratic but such a year on year fall merits further investigation. Doing so makes you spot this.

This is the 11th consecutive fall on the month a year ago.

What caused this?

Output of the mining and quarrying industries fell by 21.3 per cent in January 2012 compared with January 2011. This was the 16th consecutive decrease. The biggest decrease was in the extraction of oil and gas which fell by 23.9 per cent.

So a major cause in this is the decline of North Sea oil and gas production and this is something likely to be a continuing factor. I guess the UK government is probably regretting raising the level of taxation on this industry right now and I wonder if the claimed revenue increase might turn out to be a decline in reality in an interesting application of the laffer curve.

Also there was something giving food for thought tucked away in the numbers as energy output fell by 9.3% in the year on year comparison in January. Remember when cold weather was blamed for output falls well now warmer weather can take its share of the blame. Perhaps someone could track down Goldilocks and as her what winter weather is not too hot and not too cold!

Wasn’t industrial production supposed to be expanding?

Here we get to the Markit purchasing managers survey for January which recorded 52 for manufacturing and 51.4 for manufacturing. This had looked hopeful but from the official numbers we see that manufacturing did edge forwards by not by enough to help the overall picture by much.

The seasonally adjusted Index of Manufacturing rose by 0.1 per cent between December 2011 and January 2012.

Actually on a year on year basis the growth rate was only 0.3%. For those who like the overall numbers on a scale where 2008=100 UK manufacturing is now at 95.8 and the overall industrial production figure is even worse at 90.2.

What does the National Institute for Economic and Social Research (NIESR) say?

They provided a little cheer but as you can see only a little. 

Our monthly estimates of GDP suggest that output grew by 0.1 per cent in the three months ending in February after a contraction of 0.2 per cent in the three months ending in January 2012.

So we have a picture which has an improvement but a fair way short of what we might have hoped for. Indeed if we look at the NIESR’s graph of past recessions we see an even more troubling picture. The “Great Depression” of 1930-34 would have been over by now and we would be solidly into a recovery as would the 1979-83 recession whereas we are left weaker than when the credit crunch started and even worse the last 18 months have shown no sign of any sustained improvement. I will leave you with the thought below.

Weren’t we supposed to have learnt from the past and accordingly responded in a more effective fashion this time around? Those who are rightly critical of 1930s economic policy have now to face up to the prospect that our generation has done little better and may have done worse.

Inflation is dead isn’t it?

Producer Price Inflation

Here we saw a considerable pick-up which the headline rise for the output number from 4 to 4.1% did not give full justice too as underlying this we saw.

Between January and February the output index for home sales of manufactured products rose 0.6 per cent.

Oh well this is just a glitch/freak is it not? Not if you look further down the chain at input prices.

In the year to February 2012 the total input price index rose 7.3 per cent, compared with a rise of 6.6 per cent last month.

Between January and February the total input price index rose 2.1 per cent.

If we look to the detail of the numbers we see that for the output figures the rising price of oil was  a factor but that tobacco and alcohol and other manufactured products were bigger ones. If we look at the input numbers we see the price of oil/fuel as the strongest factor but there were others too. So we are left with the view that the rising price of oil has exacerbated an existing problem.

Looking Forwards

As we peer through the gloom and try to see where we are going we see that the purchasing manager numbers for February weakened compared to January. That does not leave a lot of hope for industrial output in the first quarter of 2012. Accordingly we need to hope that the numbers for the service sector are accurate. We saw 56 in January and 53.8 in February and we have to hope that this is backed up by real developments in the largest part of our economy.

If we peer further ahead I worry about the impact of the oil price but of course there is much uncertainty about where it will be and some of that is political as what happens to Iran is a big factor. But another market worries me and it is the perennial UK problem area the housing market. We are seeing more and more lenders annouce increases in mortgage rates for 2012. The largest move was by Bank of Ireland which plans to increase in standard variable rate in two steps from 2.99% to 4.49% by the autumn and the latest was by the subsidiaries of National Australia Bank (Clydesdale and Yorkshire). This added to the Royal Bank of Scotland,Halifax and Santander.

Whilst this is bad enough on competition grounds (as it is prima facie evidence of a banking cartel in operation) it will also be a brake on UK economic activity as 2012 progresses. It also shows another widening gap between political rhetoric, “low interest-rates” and the reality of higher mortgage-rates for an increasing number of borrowers.

High loan to value mortgages are a bad thing aren’t they?

Back in 2008 UK politicians queued up to criticise the low level of many mortgage deposits and blaming them for the credit crunch. Move forwards some four years and we see the UK government announcing this.

95% percent mortgages will be made available to existing homeowners as well as first-time buyers (FTBs) on new-build properties (houses and flats) worth up to £500,000.

And the UK taxpayer will be backing this as should the 5% deposit be used up then the builder will provide 3.5% and the UK taxpayer 5.5%. In a sustained fall in the housing market what would happen to house builders? Yes in another “surprise” the UK taxpayer would no doubt find itself bailing out the house builders 3.5% as well as paying its own share of 5.5% making 9% in total.

Why taxpayers who cannot afford to buy a house should subsidise others to do so is beyond me. It is also breath-taking that we have forgotten one of the lessons of the credit crunch so quickly. Furthermore as it will lead to upward pressure on house prices it will make them even less affordable for first time buyers particularly if real wages continue to fall.

According to the Council of Mortgage Lenders the buyers will be “creditworthy” and in response to my reply that the saving of a deposit was one of the demonstrations of creditworthiness they replied that saving a 5% deposit was evidence. Shame that last time round in the housing boom banks would give out personal loans to pay the deposit and as we know bank behaviour has changed not one jot.

The UK and its banks

1. We give them cheap money and lots of it.

2. We bail them out if inspite of this they become insolvent ignoring that they caused the insolvency.

3. Now the banks raise mortgage rates to ensure a profit

4. We add to it by guaranteeing loans so that they can make low risk profits.

This is one of the most one-sided deals in history is it not?





This entry was posted in Banks, Financial crisis, General Economics, House Prices, Inflation, Quantitative Easing and Extraordinary Monetary Measures, Stagflation, UK Inflation Prospects and Issues. Bookmark the permalink.
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  • Lee M

    Why taxpayers who cannot afford to buy a house should subsidise others to do so is beyond me. It is also breath-taking that we have forgotten one of the lessons of the credit crunch so quickly. Furthermore as it will lead to upward pressure on house prices it will make them even less affordable for first time buyers particularly if real wages continue to fall.
    The UK and its banks
    1. We give them cheap money and lots of it.
    2. We bail them out if inspite of this they become insolvent ignoring that they caused the insolvency.
    3. Now the banks raise mortgage rates to ensure a profit
    4. We add to it by guaranteeing loans so that they can make low risk profits.
    This is one of the most one-sided deals in history is it not?

    Couldn’t agree with you more.  Why is it that anyone with an ounce of sense can see this but our politicians just seem to stumble blindly on?????
    Or am I giving them too much credit and they are really hand in glove with the banks and just think we’re stupid enough to go along with it.

  • Anonymous

    Politicians take the path of least resistance. The real scoundrels are the financial journalists, who solemnly report that the MPC expects inflation to be at or near the target in the medium-term. To paraphrase the immortal words of Mandy Rice-Davies, “Well they would, wouldn’t they?”

  • Drf

    We need to consider in this scenario that the government is now desperate! They do not know what to do except that they shy away from doing what in reality they know they need to do as the only action which would restore the UK economy; that is to drastically reduce the Public sector and halve total taxation. The only strategy which the government and BoE have is to try to prop-up the housing market to avoid a collapse in prices, which would then result in many banks and building societies becoming seriously insolvent due to repossession values plumetting; and to force an artificially-low “emergency” base rate to be “maintained” long-term accompanied by QE (debasement) to continue to fund the increasing public deficit, as tax revenues fall in real terms. (Debasement reduces the real value of tax revenues and their purchasing power, just as it steals value from all citizens.) The quick fix has its penalties. Meanwhile this absurd action further destroys the real economy and the real wealth creating process.

    Of course in the longer term this strategy cannot work, and water will eventually find its own level. The necessary economic correction cannot be avoided ultimately, any more than it was possible to do so in the 30′s Great Depression.  The pity is that the present strategy will result in even more pain and suffering than would have been necessary in just facing the reality caused by previous long-term political errors, and taking the medicine.  The reality is that the UK is no longer a great economic force; politicians have destroyed it, and are now busy destroying its currency, but still persist in remnants of Empire war games as if it were still a significant nation.  The next political “solution” just as in the 30s will be a global war!

  • young Jeremiah


    Is this increasing of the base rate, despite no increase by the BoE, evidence that some UK banks have dodgy, toxic sovereign bond crapola on their books and are getting margin called by the ECB?

    Young Jeremiah.

  • William

    Once taxpayers start underwriting mortgages how do we ever stop?
    The spin is it ‘helps first time buyers onto the housing ladder’ and ‘kick-starts the housing market’ but the reality is all it does is ensure the few new homes that are built will always sell at top price.
    What a strange world we live in. Housing is neither a capitalist free market nor is it a socialist one.
    If it were a free market then the massive demand for homes would provide incentive for builders to fill that demand and compete against themselves on price filling the demand and, in theory, providing homes for everyone at a price they can afford.
    A socialist housing policy would see the government building affordable homes for everyone paid for out of general taxation.
    Either way is better than what we’ve ended with as most people would have some kind of affordable roof over their heads.
    No doubt one of the reasons given will be about providing ‘stability’ in the housing market, but various politicians have been saying that since 2008, and it is just another way of saying they want to keep the housing bubble inflated.
    The reason it has taken them 4 years to get to this point is for most of that time inquiries have been going on into mortgage lending with the threat hanging over the lenders of real limits on LTV and salary multiples lent. They lobbied hard though and the resultant ‘rules’ are nothing more than a fig leaf to cover up the fact that they are more or less able to lend whatever they want to anyone, just like before.
    The 20% deposit was there to absorb 2 multiples of a person’s salary at a time when the banks thought they might be restricted to 5 times salary loans. Now that isn’t going to happen they want to start lending as near to the full amount as possible but knowing it is still a bubble don’t want to take the risk. Step forward you and me, the taxpayer.
    There are plenty of taxpayers living near me, whole families living in one bed flats who will never be able to pay a 95% mortgage at today’s prices. Friends sleeping on mates sofas, people whose kids are now adults and simply can’t afford to rent or buy anywhere who are being taxed to remain that way. In my opinion this issue will be a slow burner, like the 10p tax thing a few years ago, but once the penny drops I think it could lead to Poll Tax levels of anger.

  • James

    The sad thing is that
    1. The government still seems to think that throwing money at a problem is a way to address it
    2. This looks like further proof of the lobbying power of the building industry
    3. noone in government seems to think anything through. Whether it is QE or this crazy idea of subsidising a bubble through debt, there seems to be no well defined benefit to the country as a whole

  • Ian_jones

    Money flows to where the return is highest. Thus it disappears overseas to higher yielding assets. Interest rates for mortgages need to rise to attract more supply. You can control quanity or price but not both! We will stagnate until general prices and asset prices return to equilibrium.

  • pavlo

    It would have been better for the chancellor to move the value bands on stamp duty to take more houses out of stamp duty and to reduce the duty on  houses up to 1.0mil. This would not have a major financial impact but would breath life into the housing market.

  • The_forbin_project

    I wonder when it will finally sink in about Oil and Gas  here in the UK.  Shaun I see you made the passing remark about the tax. Would make a blind bit of difference in the medium term  – sorry but it won’t . Some may blather on about crack pot Peak-Oilers  BUT take a look at our patch – no amount of tax cuts will beat geology !  Ours is being sold off now cheap and not husbanded. ( sell cheap gas to continentals in the Summer – buy back at a premium in winter – priceless! )

    Think of our balance of payments regards energy!

    will you do a projection on that Shaun?

    The truth is we laid off our Manufacturing , the banks are bust ( and would be even more bust if house prices reflect the  normal averages)  and our oil and gas are running out – we now import more and more and compete with China with whats left in the free market .

    and if that Iran thing goes off in Hormuz……..

    thanks for the blog , Shaun, at least I can get a more realistic view here – any ideas at to why Main stream  can’t ?


  • Nickrl

    Shaun, i experienced the 70′s and 80′s recessions but fortunately i wasnt around in the 30′s so can only look at old films to get a sense of the impact. Despite the slow recovery the scale of the impact of the majority of individuals is muted. Most people are still enjoying meals out, multiple holidays and have a nice motor and if you had a hefty mortgage are positively well off. So in reality this doesnt look like nor feel like any previous recession which is why the bankers/politcians can get away with it there actions. Lets also be honest people are so much better off relative previous generations they arent even interested in was happening around them and of of course by they do the perpetrators will be long gone

  • JW

    Hi Shaun
    Excellent couple of blogs Fri , Mon.
    We live in a ‘double-speak’ world.
    Official US employment points to recovery;Greek PSI points to better future; China inflation weakens; New mortgage deals for UK buyers etc etc; at last its getting better.
    But ….US full-time employment is cratering, wages are stagnant, all below numbers over a decade ago; Greece has €35bn more debt than before and employment/economy going down the plughole, Portugal next; China is stockpiling commodities inc oil and cannot reinflate like ’08; UK tax-payers had to bail out banks with dodgy mortgage books, now its being asked to backstop the risk for developers as well.
    Meanwhile the Baltic Dry Index is still falling, below 2000 levels. Oil price pressures mount, US sends 3rd carrier to the Gulf.
    Help, I want to get off, I want my money back! 

  • ExpatInBG


    If you want to see signs of improvement, look at Iceland. They did not rob the taxpayers to rescue bank directors and shareholders.

  • Anonymous

    Hi Lee and welcome to my part of the blogosphere.

    I am not one for conspiracy theories but the evidence keeps building that the actual plans of politicians when they get into power are very different to the ones they proclaim to get power…

  • Anonymous

    Hi Drf

    I find it particularly sobering that after the soul-searching and analysis that went on after the Great Depression we are putting in a performance some 80 odd years later that looks inferior in many respects.

  • Anonymous

    Hi Jerry

    I think that the UK banks have never fully dealt with the toxic assets on their books. But the sovereign debt of the peripheral Euro zone nations may only be a minor part of it as we have plenty of housing and other debt that I do not believe has been properly valued.

    So whilst ECB margin calls would be unwelcome I think we have bigger fish to fry in the UK. Should the gilt market trun lower on a sustained basis then our banks will find much deeper challenges as they have been encouraged to invest in it.

  • Anonymous

    Hi James

    It is yet another response to a perceived short-term problem which actually makes the longer-term situation worse.

  • Anonymous

    Hi pavlo

    They have been trying the stamp duty game on two counts. Firstly there has been the publicised initiative for first time buyers which soon ends and secondly there has been the way of avoiding stamp duty on expensive houses which so many foreign buyers have taken advantage of.
    Politicians waffle about wealth and property taxes whilst in reality they have made the higher rates of stamp duty on housing a voluntary tax which exposes them as either incompetents or misrepresenters.

  • Anonymous

    Hi Nickrl

    What you say is true. However part of that is because some of the reality has been postponed as that poor can takes another good kicking into the future. Should we have a slow year or two we are in danger of being exposed in the same way as some Euro nations have been and by then the alternatives will be few indeed.

  • Anonymous

    Hi JW

    Thank you. There is so much to cover. I was discussing Ghana earlier and there is much going on there ( I know someone who commutes between the UK and his main job there). So I may get around to Africa soon although on the surface in Ghana at least things look better there.

  • David Lilley


    The UK was in real danger prior to the election of the coalition. We had the biggest debt in the world; personal, corporate and sovereign, and our deficit was larger than that of Greece. We saved ourselves with some words “we have a credible deficit reduction plan”. Greece and others couldn’t put these words together.

    Mervin King called the debt decade the “nice decade”. Gordon Brown claimed 53 quarters of increased growth. But there was a fly in the ointment. We took a sub and claimed that we were earning £200 per week when we were only earning £100 per week.

    Tell me I am wrong. But our GDP was benefiting from the spend that came from £15b per year of  pensions tax credit, £400b of home equity release and £316b of off balance sheet PFI.

    These figures are a little dated but still give quantum; personal debt of 106% of GDP, corporate debt of 126% of GDP and sovereign debt of 89% of GDP. All debt bringing forward future income and spending it today. A sub, resulting in a nice decade but all having to be paid back in the future.

    A little calculation, conservative because it ignores corporate and sovereign debt. If the growth in personal debt (most, £1.2t, being mortgage debt) was grown from zero to 106% of GDP in a decade (1997 to 2007) and this growth was linear then personal debt would add 10% pa to GDP. As a result GDP would fall from an average of plus 3% pa to minus 7% pa.

    As we enter a new world of deleveraging the debt/credit element becomes visible. Consumer spending on credit cards and home equity release disappears and is further reduced by deleveraging, paying off loans.

    The 1929 Wall Street crash and the following GD was only due to a stock bubble with few participants buying stocks with a 25% deposit. The second great contraction involved much greater numbers inflating a world wide property bubble.

    We have better tools to control the downside but it is a much bigger deal than GD1.

    Please tell me I am wrong.

  • JW

     Mr Lilley
    If I may respond.
    You are wromg and correct.
    Wrong because mortgage holders will not de-leverage their whole debt overnight, so your simplistic UK GDP numbers are overstated.
    You are correct GD2 is a bigger deal, because the financialisation of all western economies is deeper and larger than before. At least 30% of the growth over the last 2 decades has been ‘borrowed’ from the future. There is no escape from pay-back. The question is, will it be lengthy slow decline, the current modus operandi of CBs, or quicker ‘anarchaic’ depression. The problem with the current strategy is that the lies become less believable by the day and the zombie banks/consumers become mortified. At least the quick, sharp remedy could stimulate growth, but it could also stimulate tyrants.
    Either way for 99.9% of us the future looks bleaker, especially for our kids.

  • Anonymous

    Hello David,

    I agree that we have been living beyond our means, both individually and collectively. The question the coalition need to answer is why they continue to reward the bank directors failures ? Surely we need to ask of Northern Rock, HBOS and RBS – who is responsible and debar them from working in similar positions of responsibility. Quick effective action against them by the Crown Prosecution service would also help reassure taxpayers that the coalition are effective and impartial managers of the economy.

    You claim we have better tools to manage the downside now, but there are still risks. Yes the coalition has admitted excess debt is a problem and has taken a small step in the right direction, but the UK is still borrowing way too much. There is a risk that we lose the confidence of the lenders and get caught in a debt spiral – what can your tools do to stop hyperinflation and/or a currency collapse ? and at what cost ?

  • TonyL

    Yes, mortgage rates are going up. But no one has mentioned the possible flipside of this. Rising home loan levels should or could  lead to higher interest for savers. If they do, then the group which has been subsidising home buyers gets increased spending power.  And the government gets more tax revenue as well as it takes from interest payments.

  • Anonymous

    Hi Tony and welcome to my part of the blogosphere.

    I have followed the savings position since I started this blog and here are my thoughts from March 6th.

    “Is this true?

    Let us go back to December 2009 when I looked at the retail savings market.
    Until this weekend it was possible to invest money on a one year basis with National Savings (backed by the UK government) and get a gross return of 3.95%. Some savings institutions are offering rates of around 3% on instant access.
    Checking this morning unless you have £50k to invest the best instant access savings rate is 3.1% and the best one-year savings rate is 3.65% (h/t MoneySavingExpert). So what change there has been there has mostly been in lower fixed rates. Not quite what we are being told is it?”

    So as we stand there is little or no sign savings rates rising.

  • Anonymous

    Good post, but there have been no political errors; they know what they are doing!

  • Anonymous

    It would have been better for the chancellor to eliminate stamp duty completely!