Today I wish to look at the UK and its current economic policy and in doing so I think I can slay or at least address some of the dragons of the mainstream media. Let me address one via pointing out that the International Monetary Fund has just reduced its forecast for economic growth in 2012 in the UK from 1.6% in September 2011 to 0.6% now. The reverence with this was treated forgets that they are saying they were wrong only 4 months ago but that we should trust a forecast for the next 11 months or 2.75 times as long!
Actually there was an example of a complete volte face tucked away in these forecasts. If one looks to the Iberian Peninsula and sees Spain one sees projected economic growth for 2012 dropping from +1.1% in September 2011 to -1.7%. So the organisation which is treated with reverence by many has in fact just confessed to being completely wrong only 4 months ago and,in my opinion, if the current trajectory of the Spanish economy continues as it is will be even more wrong by the end of 2012.
Global rebalancing will save us all
This has been a common theme and I will discuss it today later with reference to Mervyn King but many others have been pedalling this line such as Martin Wolf in the Financial Times. In essence it has been presented as a cure and an end in itself. However in 2011 it has been happening in some places as we have seen China’s trade surplus reduce.
Last night we saw what is a real game-changer for this policy as Japan declared her first annual trade deficit for 31 years as she imported some £20.6 billion more than she exported. Some of this was due to the tsunami that hit her in the spring but some looks likely to continue and if so we have seen a re-balancing as a major net exporter ends up importing an extra 12%. This also comes on top of an 18% increase in imports of goods in 2010 so that Japan has raised her imports of goods by £136 billion in 2 years.
Are we saved? Not looking at 2012 we are not. Indeed we have many issues facing us so we see that this is something that may well help but far from a Holy Grail I am afraid.
The Governor of the Bank of England Mervyn King gives a speech
Before I address the re-balancing or rather lack of the UK economy I will like to point to what I consider to be a glaring error in Mervyn King’s speech last night. It is shown below.
But there is no reason to despair.
In an environment where expectations matter very much then he should avoid such language as headline writers will latch onto it and readers will only concentrate on one word “despair”. I think that the effect of expectations and the loss of credibility of policy-makers as they lurch from error to error and then deny it has been much stronger over the credit crunch period than many think. It is hard to measure but I believe that there has been an actual cost to the decline of credibility of policy-makers. Also references as shown below are likely to cause further concern to what John Maynard Keynes called “animal spirits”
Mervyn King and the re-balancing of the UK
Since Mervyn invited listeners to take a look at his speech in Newcastle a year ago I did. Here are his thoughts.
In order to rebalance our economy towards net trade and away from consumption a fall in sterling was necessary.
So the rebalancing of the economy towards net exports and away from consumption is well underway.
As a response I would like to repeat what I posted on the 12th of January.
Regular readers will be aware that I feel that monthly balance of payments figures are erratic and unreliable so I looked at the quarterly ones for 2011 and here they are.
Q1 -£5.2 billion
Q2 -£7.22 billion
Q3 -£9.89 billion
A crueler man than me would point out that these exhibit exactly the reverse of the “re-balancing” claimed by the Bank of England. I will restrain myself to simply asking them to explain exactly how these exhibit re-balancing?
You may notice that in last night’s speech Mervyn King did not refer directly to export performance in 2011 but instead went back to 2007.
net exports have improved by two percentage points of GDP since 2007
Indeed he is happy to slap himself on the back on this point as he goes on to say.
thanks, in part, to a fall in the value of sterling against other currencies of around 25%.
Regular readers will have spotted that Mervyn is bathing in the spotlight of a supposed surge in net exports due to the pounds fall. And yet when the same fall in the pound causes inflation apparently it was nothing to do with him! He does sneak a reference in but hides it in the middle so I have emphasised it for him.
Since 2007, increases in VAT, import prices and energy prices have together pushed up the price level by as much as 15%,
Remember the rise in energy prices was also partly driven by the fall in the pound as they are priced in US dollars. We have fallen from a peak of around 2 US dollars in the spring of 2008 to 1.55 now so there is a drop of over 20% on its own.
So having contributed to a burst of UK inflation Mervyn King shows us that he can address expectations when it suits him.
In fact, after taking into account normal seasonal variation, the rate of price increases in the past few months has been close to 2% a year.
If we look at the last four months and use the Consumer Price Index then it has risen by 1.3% over the last four months if we simply add the monthly increases. Also one could argue that as this December saw a lot of price cutting the seasonal influences were stronger than usual in a downwards direction! If we look at the Retail Prices Index then adding the four months together gives us 1.4%. And even worse for Mervyn’s argument the last three monthly increases have gone, flat,+0.2% and +0.4% which some might argue looks like an acceleration…..
What is the policy prescription?
It looks unchanged and there is more than a hint of further Quantitative Easing .
And, with inflation falling back and wage growth subdued, there is scope for interest rates to remain low, and, if necessary, for further asset purchases, to prevent inflation falling below the 2% target.
Of course Mervyn has been telling us that inflation is in danger of falling below the 2% target for several years now whereas it has done precisely the reverse! If we go back to Mervyn’s speech in Newcastle from a year ago he told us this.
CPI inflation was 3.7% at the end of last year, and has averaged 3% since the start of 2008, above our 2% target.
Yes it averaged 3% over a period where he was telling us it would fall. It has continued way over target since then and led to this.
The consequence has been a ferocious squeeze in the purchasing power of take-home pay……….. As a result, we have now experienced the longest period over which real wages have failed to rise since the 1920s.
Mervyn has spotted that this caused a problem.
That led to a fall in consumer spending which accounted for much of the weakness in growth in 2011.
But as ever he fails to see that his policies are culpable as they have contributed to this. Which of course is the opposite of his claims about the same policies and net exports!
Today’s UK Gross Domestic Product figures
From the Office for National Statistics (ONS) and by GDP they mean Gross Domestic Product.
The chained volume measure of GDP decreased by 0.2 per cent in the fourth quarter of 2011
First please remember that such a number is considerably below the likely error on a preliminary estimate which this is. So we find that the stagflationary theme I have been pursuing has some more evidence in its favour when we look over a longer timespan.
GDP in volume terms increased by 0.8 per cent in Q4 2011 compared with Q4 2010
If we look at the detail in the numbers we find something that looks worrying and not only for Mervyn King’s rebalancing thesis.
Manufacturing contributed the most to the decline (in the index of production)
There was a spell when UK manufacturing output looked healthy but there have been one or two misfires more recently. Also I spotted these two members on the list of declining items.
Manufacturing contributed the most to the decline, followed by electricity, gas, steam and air conditioning supply
Are you thinking what I am thinking? How much of this year’s recorded fall in GDP was caused by a drop in energy production due to a milder winter? So have we had a drop in GDP last year caused by a harsh winter and this year by a milder one? According to the press conference of the ONS UK gas and electricity output fell by 4.1%.
The UK weather may well be getting out its Alan Parsons Project LPs and CDs
I just cant seem to get it right
Damned if I do and Damned if I don’t