What is happening in the UK economy? Perhaps a glimmer of light in the darkness

They have forgotten what real growth is – its probably a couple of decades since the UK had growth that wasn’t based on debt fuelled asset speculation.

Although who can be sure, they have done such a good job at corrupting inflation and GDP measures. And GDP is the wrong measure anyway, chosen partly because it is so easy to corrupt.

But people like Martin Wolf worship the god of GDP – they don’t care how it gets inflated as long as it goes up – they believe this means we are getting wealthier – or perhaps it just means he and his FT readers are getting wealthier.

So now they will switch to nominal GDP targets – the more inflation they create, the better the “growth” – but don’t worry they will say – the inflation is temporary, we only need it to kick-start growth i.e. so we can get back to debt fuelled asset speculation.

Its an Orwellian world, central banker doublespeak – 2 legs bad, 4 legs good – inflation bad, inflation good.

Hi Shaun
I didn’t read anything that Carney said that meant he wouldn’t target NGDP or do QE, he just didn’t commit either way. As you would expect from a ‘charming’ vampire-squid trained man.

More part-time, lower paid service jobs will not create the real growth we require, nor will the taxes paid cover national debt. More QE is ‘baked in’ I fear.

“They have forgotten what real growth is – its probably a couple of
decades since the UK had growth that wasn’t based on debt fuelled asset speculation.”

Real growth?

Growth
in the Naughties

Yesterday I posted a brief
note about how to think about the 2000-2007 expansion, now that
we know that there was an unsustainable housing-and-debt bubble. My
point was that this doesn’t mean that the growth was somehow fake;
real output of goods and services did indeed rise, even if the legacy
of that growth was debt that create macroeconomic problems now.

Charles Steindel emails to remind me that he actually did a
quantitative
assessment (pdf). In that analysis, he asked how much our
estimates of actual growth are affected if we consider the
possibility that (a) what Wall Street was doing wasn’t actually
productive (b) much of the housing will end up being less useful than
expected (e.g. ghost towns at the edge of urban areas).

What he finds is that even with fairly strong assumptions about
phony financials and wasted investment, you can’t make more than a
minor dent in growth estimates. On the financial side, the point is
that we measure growth by output of final goods and services, and
fancy finance is an intermediate good; so if you think Wall Street
was wasting resources, that just says that more of the actual growth
was created by manufacturers etc., and less by Goldman Sachs, than
previously estimated. On the housing side, the point is that
residential construction, even though it was at high levels, never
got much above 6 percent of GDP. So even if you believe that a large
part of the construction taking place late in the housing boom had
very low usefulness, it only subtracts slightly from growth over the
course of the whole period.

http://krugman.blogs.nytimes.com/2011/01/20/growth-in-the-naughties/

Hi Shaun,

Could we see some glimpse of the elusive green shoots so dear to Gordon Brown???

So dear to N. Lamont?

The UK isn’t great but it isn’t too bad either. I have just phoned around friends and business contacts in Greece today and the stories they tell me are horrendous indeed. Those who still have work have had to cut back dramatically – to the extent they can’t afford heating oil this winter. What it is like for others I can’t imagine. Without exception they say things are getting worse not better and are scornful of ECB claims that the worst is behind them. I have the same comments from Spain. This sounds like the politicians saying what they want to believe and not letting the ‘facts’ getting in the way.

I do wish the B of E would revisit their mandate of controlling inflation instead of being proxies of the government chasing GDP growth ‘at any cost’. If inflation was under control folk would be more inclined to spend what they have. As it is the future is too insecure.

Hi Postkey

I think you are a Keynesian , maybe even a MMT. In my humble opinion , strict followers of this ‘economics’ have no more complete answers to the current situation than followers of the ‘Austrian’ persuasion. Its a bit ‘religious’ , akin to AGW ( or lately ‘climate change, as its getting colder).

Public debt at only 60% of GDP in ‘real terms’ , less than late 40s etc. Problem lies with ‘private debt ( which is defined to include Bank debt). So what if ‘savers’ are getting a raw deal as long as ‘ordinary’ people have jobs and homes. US recession would have had -28% GDP if not for QE infinity.

I think the key ‘belief’ is that its better to run with the devil of inflation, than cut expenditure that could harm the ‘average joe’. At one level I agree, however ‘joe’ is ultimately severely harmed by inflation ( even 70s style) . The US debt increases to produce ‘growth’ are massive, and are only possible because of the dollar’s unique position and that all fiats are devaluing more or less in unison. Look at underlying US employment stats, the only growth has been in the over-55 age group, with wage levels declining and more part-time. This continues the squeeze on middle incomes over the last 30 years as all govts have more or less followed the Keynesian line. US stats are easier to find than in those of the UK, but the pattern is similar.

I do believe QE was necessary in 08, but since then its used to protect asset values for the very rich. This is not serving ‘joe’ well at all. Its just turning everywhere and everything into ‘zombies’, kept alive by the CB’s drip feed of liquidity.

I do not favour the extreme of ‘capital cleansing’ advocated by Austrians, because it would lead to communal strife. However some concerns need to go bust, bond holders need to feel some pain. There also needs to be some controlled debt foregiveness to help reset the mechanics. But it needs to go hand in hand with real supply side reform.

Hi Shaun,

An excellent blog to end the week.

The fact that we have sustained above target inflation, suggests there is more money in the system than can be usefully used! Therefore, if they create even more money, how is that going to translate into growth and not further inflation? This must surely fall into the: “Insanity is doing the same thing again and again and expecting a different result”?

Most people seem to like to ignore that since 2000, Government spending has tripled from £250bn to £744bn with no corresponding growth in GDP, so where the private sector has been squeezed since and is continued to be squeezed, why do economists expect significant growth. Public sector cuts with tax cuts are the only thing that is going to get the economy moving again. Where public sector pay is about 20% about the equivalent private sector value an across the board 20% wage cut would be a good start in rebalancing the economy.

In fact with the Government’s deficit being funded with much money from abroad, their must be a continued and rising net drain on our economy from the increased interest payments, so how is this going to help growth?

maybe the Soviets did not loose the cold war……

Forbin

Brilliantly put JW

Krugman et al. believe that inflation is necessary to reset the debt clock and let globalisation work its wonderful magic again. Just a few minor adjustments needed.

Its down to a belief – either the 3 decades prior to 2008 were an economic miracle or in my view a massive fraud, a ponzi debt scheme that could only end with Western bankruptcy.

However they can’t let too many average Joe’s suffer – otherwise they will lose control. So they will inflate the welfare state to keep them from rioting. Likewise pensioners will have to be protected – they are simply too powerful a lobby group and growing – however they will be “encouraged” to pass their housing wealth down to the unhappy grand-kids a bit sooner than they planned.

Its the middle class savers that suffer, but heh – there aren’t many left and they are a bunch of losers – westerners exist to consume – not to save.

Of course what Krugman prefers to ignore is that the biggest beneficiaries of inflation are the asset rich wealthy – maybe he is one of them by now, must be making a fortune from the crisis.

BTW – this is happening now in Argentina

http://finance.yahoo.com/news/argentina-expands-6-9-billion-welfare-program-153010197–finance.html

Hi Forbin
They morphed into other things, including AGW ‘believers’ ( who in turn are morphing into ‘population exterminators’). Thing is , they are so besotted by their ‘religion’ that they don’t realise they are the foot soldiers of the very richest elite. The Beta’s in our Brave New World.

“no corresponding growth in GDP,”?
Not according to the I.M.F.?

So you think Krugman was wrong re “My point was that this doesn’t mean that the growth was somehow fake; . . . “?

Hi postkey and welcome to my part of the blogosphere.

I was interested in the Charles Steindel paper that Paul Krugman’s quote and took a look at it. I think that its conclusions look a lot less clear if you take into account these bits.

“Even in calmer times, the output of financial industries is one of the most difficult to measure, with significant problems connected to both the determination of nominal output and the estimation of price indexes (Bosworth and Triplett, 2004), and those difficulties were arguably heightened when financial innovations were accelerating, perhaps working to exaggerate the expansion of the sector’s output.”

“Clearly, the computation of these imputed interest flows is rather arbitrary. ”

“A whole host of other questions relate to the computation of the real output of the sector, given the immense difficulties defining standardized transactions. ”

Like so many analyses of GDP accounts we find more questions than answers I think.

Hi DaveS

I guess that I would be in jail in Argentina because of my views on inflation…

Hi Pavalaki

I had seen the reports of a collapse in the demand for heating oil in Greece this winter.

“The turnover of the consumption of heating oil in the region of Attica has
dropped by 80% this winter season compared to winter 2011-2012. The collapse in demand in northern Greece remains impressive although it is lower than in the southern part of the country. In the northern areas, the decrease in the turnover of the trade of heating oil is in the range of 60% -75% depending on the specifics of the particular place and its geographical location as shown by the data, which George Asmatoglou, the chairman of the Athens union of oil dealers and petrol stations owners, presented to GRReporter.”

Truly grim.

Hi Shaun,

I hope there has been an increase in the sale of thermal underwear, other winter clothing and hot water bottles, otherwise I’m sure it will be a long cold, very uncomfortable winter for many people.

Those “green shoots” were actually a growth of mould on a dead stump – I’ll leave you to decide who deserves to be considered as making up the slime mould

Hi Postkey,

UK GDP in 2000 was just over £1.2tn in 2011 which are the last published figures, it was £1.65tn, but with the UK flat lining and 3% inflation it will be about £1.7tn for 2012. With a x3 increase in public spending for taxes to be the same percentage of GDP our current GDP would have to be £3.6tn, which we are well short of.

This has meant there has had to be major tax increases and the running of major deficits to cover this and of course as borrowing increases so does the interest. Government spending is still increasing with the ‘austerity’ measures largely being used for the increase in interest payments.

The Government is increasingly the wrong side of the Laffer curve with taxation. A good example is that in the first 9 months of 2012 1.1bn less gallons of fuel were used by motorists than in the same period of 2008. About 40% of motorists have cut down on their journeys by planning things more carefully to make fewer of them and 7% of the population have stopped driving, many due to fuel costs. Many others have down sized their vehicles or bought newer ones to get better fuel consumption. I’m sure further fuel tax increases will accelerate this trend further.

We also know that the 50% tax rate has cut the size of those declaring income over £150,000 from 16,000 to about 6,000 where the very rich and super rich can decide when and where they will pay tax on income, if they volunteer to pay any at all.

Hi Shaun,

” as they are in fact the equivalent of a lasagne made by Findus or a Burger King burger.”

That did make me laugh.

Hi Shaun,

Thanks for the welcome and your comments.

Hi Shaun,

I’m seeing temperatures nearly 20 degrees warmer than Jan / Feb 2012. Last year we had -30 C and winds/snow persistently from the north east (Siberia) and this year we’re getting south westers and lows like -8 or -10.

I know we get much colder than Greece, but I’d guess Greece is still having a warmer winter this year.

Hi Postkey

First problem is the use of GDP to measure growth. In my view its a highly flawed measure and unfortunately its been heavily messed with by successive governments – I believe always to the upside e.g. heuristics, geometric weighting, implied owner-occupier rents and similar manipulation of the gdp deflator. Upshot is consistently over-stated GDP.

But that aside, then in the UK (and much of the West) then I don’t doubt consumption of goods and services did increase considerably.

But goods production didn’t (as shown in trade numbers) and services output was largely a function off the debt boom e.g. financial services, housing, government spending. dog grooming salons etc.

It was a function of unsustainable borrowing and an unsustainable bubble in housing market. To me that is fake growth – not real growth.

This is exactly the position we find ourselves in now. The banks can’t fund increased consumer borrowing at rates the consumer can afford. They can no longer borrow cheap Chinese debt at anything like the scale pre-2008. Instead they borrow at below market rates from the BoE in exchange for near worthless collateral. But they can only borrow enough to prevent collapse of housing market – the BoE can’t really let them expand balance sheets after the 2008 crash (even though it might like too).

So housing market stalls, consumer spending stalls, services growth stalls, and manufacturing continues its long term decline. No debt growth, no GDP growth. Answer is to boost demand – which is just doublespeak to pump more debt (this time printed by the BoE) to over-indebted consumers and force any nervous savers to liquidate their savings – savings that should have been used for proper investment.

However I accept mainstream economics is quite happy to accept that GDP can come from consumption or production, that trade deficits are fine as long as they are financed by foreign “investment”. It doesn’t matter that the “investment” has been squandered on an orgy of consumerism and near worthless bricks & mortar.

Hi Expat
I certainly hope so although it was very wintry today in London with sleet and snow. And if I didnt already feel a bit wintry today thinking of -8 to -10 being considered a lot warmer will do the trick!

Following our conversation at the gym, I’m growing increasingly convinced that we’re bottoming. The government isn’t helping much, but real people doing real stuff hasn’t stopped, and I’m getting increasingly confident. Some thoughts:

1) Most people think the economy is getting worse, but they think their own employment and financial prospects aren’t declining or or even improving. So people think things are getting worse, but only for other people. Market sentiment.
2) Consumer debt is less than half what it was in 2008

3) Assuming 25% inflation since 2008, the deficit is now half what it was four years ago in real terms.
4) taking inflation into account, petrol is cheaper now than it was when it hit £1 in 2000.

5) Have you seen the shale gas figures from the British Geological Survey? Mad numbers.
6) Company cash pots just keep getting bigger – Shells latest report says they expect to have between 40-70bn cash after expenses over the next few years.

I don’t reckon the corner is turned yet, but I reckon we can see it.

Hi David
As ever for the UK it is the inflation/growth mix which is the issue. I fear that our policymakers will stoke the inflationary fires and fritter any gains away….

I don’t disagree, I just find myself getting less and less long-term bearish by the day in the face of utter market negativity from all sides. Will we see some sort of capitulation move?

Found another great quote: “In other periods of [economic] depression it has always been possible to see some things which were solid and upon which you could base hope, but as I look about, I now see nothing to give ground to hope.”

Calvin Coolidge said that in 1933, at the same time the Dow bottomed and turned…