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

The last 48 hours has seen evidence of some panic in the UK economics establishment. It was only on Wednesday that I discussed Lord Adair Turner’s views on money printing,which are in essence yes please. Since then Martin Wolf of the Financial Times and Anatole Kaletsky of Reuters have rushed to support such a stance. For those of a nervous disposition do not be worried about their apparent “respected” status as they are in fact the equivalent of a lasagne made by Findus or a Burger King burger. Indeed it is very kind of them to confirm the critique of their philosophy I wrote in the early days of this blog which is that their favourite policies will fail but rather than analyse this they will demand “More,More,More”. It would appear that they are also fans of Luther Vandross.

Never too much, never too much, never too much

Of course should even more economists join them we know the track record of large groups of economists when they recommend something!

Anyway the proposal did not have the best of days as the incoming Bank of England Governor Mark Carney clearly stated he was against money printing or “helicopter drops” and he was unequivocal “under any circumstances”.

The UK economy

If we consider the position we see that it has been provoked by the current state of the UK economy which in spite of the measures the trio above have supported-do not forget that their previous wheeze was that failure called Quantitative Easing- has in essence flat-lined for the last three years or so. Indeed we got an update from several sources yesterday as to where we stand right now from which we can gain some insight.

Economic output

The National Institute for Economic and Social Research or NIESR told us this.

Our monthly estimates of GDP suggest that output grew by 0.0 per cent in the three months ending in January 2013 after a decline of 0.3 per cent in the three months ending in December 2012. We expect the UK economy to expand this year, but at a relatively modest pace.

So as you can see we are doing better than we were but that only gets us to flat-lining! Sadly the “expand this year” may come a cropper due to the fact that inflation is invariably inconvenient for their model. Or to put into another way it is always about to fall in their world,indeed sometimes as I saw its head Jonathan Portes tell us on the BBC last summer “rapidly and heavily”,which of course is now in my financial lexicon.

However there is food for though here particularly if in the light of the above they are likely to be over optimistic about output.

We do not expect output to pass its peak in early 2008 until 2015.

Industrial Production

Here we saw the Office for National Statistics drum a very similar beat.

Production on a seasonally adjusted basis rose by 1.1% between November 2012 and December 2012, mining & quarrying rose by 1.2% and manufacturing rose by 1.6%

On its own this sets a cheery note in a difficult environment but as soon as we look for some perspective we see that the cheer mostly evaporates.

Production on a seasonally adjusted basis fell by 1.7% in December 2012 compared with December 2011

Manufacturing on a seasonally adjusted basis fell by 1.5% in December 2012 compared with December 2011

Indeed on a measure where 2009=100 UK industrial production ended 2012 at 98.5. Speaking of fans of monetary expansion how is Mervyn King’s “rebalancing” going there?

 A Rewrite for history

Last night the Chairman of the Treasury Select Committee told us this on the Jeff Randall Show on Sky according to their twitter feed.

Andrew Tyrie, chairman of the Treasury Select Committee on Sir Mervyn King: History will judge him well

Only if he writes it himself….

What about construction?

This has had a dreadful run which reminds me one more time that we should be grateful we did not join the Euro as Lord Adair Turner advised. After all imagine what interest-rates set for Germany would have done to our housing market! Even on our own we have managed a boom and bust.

The estimated total volume of construction output in the fourth quarter of 2012 fell by 9.3% compared with the same quarter of 2011

If you live in London as I do where a forest of skyscrapers has sprung up on the skyline this is hard to digest, however output elsewhere must be really grim. But we see that the more recent picture in line with the other sectors above has improved.

The estimated total volume of construction output in the fourth quarter of 2012 grew by 0.9% compared with the third quarter of 2012

These numbers were better than those estimated in the UK Gross Domestic Product numbers for the last quarter of 2012 and it would have been 0.04% higher with them.

The service sector

We had received some optimistic news earlier this week from the Markit Purchasing Manager’s Index.

A return to growth of the UK service sector was signalled at the start of 2013 as volumes of incoming new business increased and companies boosted capacity by adding to their payrolls.

A reading of 51.5 only indicates modest expansion but we should take every scrap we can and please re-read the last line about employment. For newer readers employment trends have proved to be something of a hint to the economic future and indeed have been one of the better ones. Interestingly we got another hint today from the KPMG jobs market report.

Demand for staff continued to increase at the start of 2013. The rate of growth in permanent vacancies quickened to a 21-month high, but temp vacancies rose at a slightly slower pace than in December.


So as you can see there are flickerings of light in the UK economy at the opening of 2013. Should rising employment demand continue and the service sector continue to edge forwards then we will avoid the triple dip that headline writers already have their pens and keyboards ready for! Such a move would be consistent with the behaviour of the UK money supply in the middle/latter part of 2012.

However there is a possible “rub” as Shakespeare put it and that is our inflation prospects. The monetary boost could slip away into inflation in what is a very familiar development for students of UK economic history. I am reminded of my critique of the NIESR above where under forecasting of inflation has been a flaw of theirs. If we look at something as basic as the oil price we see that there are clear dangers. On its own it has been rising in 2013 as it is up nearly 6% at US $117.65 for a barrel of Brent Crude as I type this. The weakness of the pound has added to this and means that at £74.82 we have seen a 9% rise in 2013. If we add in the UK tendency to institutionalised inflation of which we saw another example this week as water bills rose at an average of 3.5% there are very real dangers. Also the hapless head of the regulator Ofwat described the increases as being driven by inflation which is strange for something above it!

If we return to the views of the trio above in essence my critique if this. The financial and monetary wheezes which they keep wanting to press on us keep raising inflation with very little actual growth being provided. As they press for more let me remind them that this inflation via its impact on real wages (which have fallen by 7% over the past five years) has been a contractionary influence on the UK economy. Accordingly their new plans are ikely to be as unsuccessful as their previous ones.

So here is my alternative. As we have some embers of growth how about us trying to keep inflation contained so that we can hopefully have some real growth rather than the fictional variety?

This entry was posted in GDP, General Economics, Growth, Inflation, Quantitative Easing and Extraordinary Monetary Measures, Stagflation, UK Inflation Prospects and Issues, Uncategorized and tagged , , , , . Bookmark the permalink.
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  • DaveS

    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.

  • JW

    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.

  • Postkey

    “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?

    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
    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.


  • Justathought

    Hi Shaun,

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

  • Postkey

    So dear to N. Lamont?

  • pavlaki

    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.

  • JW

    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.

  • Rods

    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?

  • forbin

    maybe the Soviets did not loose the cold war……


  • DaveS

    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.

  • DaveS
  • JW

    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.

  • Postkey

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

  • Postkey

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

  • Anonymous

    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.

  • Anonymous

    Hi DaveS

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

  • Anonymous

    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.

  • Rods

    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.

  • Russell

    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 :-)

  • Rods

    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.

  • Cookie Monster

    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.

  • Postkey

    Hi Shaun,

    Thanks for the welcome and your comments.

  • Anonymous

    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.

  • DaveS

    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.

  • Anonymous

    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!

  • david

    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.

  • Anonymous

    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….

  • david

    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…