What happened to all the economic growth that we were promised for 2012?

1st June 2012

Today I wish to discuss economic growth and in particular how it is disappointing and indeed disappearing in 2012. Partly this has come to mind because of the visit of the American economist Paul Krugman to the UK. He has been a cheerleader for the stimulus measures that have been made by President Obama in the United States and stood full square behind the prediction that the US economy would grow by 4% a year as a result of these measures. When challenged on this he replied with a post entitled the “Roots of Evil” discussing his opponents views and stated: "it is right to expect high growth in future if the economy is depressed now….And yes, we can expect fast growth if and when that capacity comes back into use."

You may have missed such a discussion in the generally laudatory reception that Mr.Krugman received in the UK. This is because it seemed to get airbrushed from history by supporters of fiscal expansion. This was somewhat odd when in the same week we had the latest update on figures for economic growth in the United States.

Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 1.9 percent in the first quarter of 2012.

Not only is the US economy not growing at an annual rate of 4% but this represents a reduction from the previous 2.2% estimate and the original 2.5%. If we look back to 2011 we see annualised GDP growth rates of 0.4%,1.3%,1.8% and 3%. So we see that US economic growth has considerably underperformed what was promised by the advocates of it such as Paul Krugman. A consequence of this is the debate over the US fiscal deficit as it is the difference between the promises made and reality that has led to it remaining a problem.

The US economy right now

If we move on from GDP statistics which have been criticised (by me if no-one else) we have seen that unemployment and employment numbers have become a guide in the credit crunch era rather than a lagging indicator. On that front the ADP employment number released yesterday in the US disappointed too as it showed manufacturing employment falling. Added to that we had another weekly initial unemployment claim number that left us somewhere in no-mans land.

In the week ending May 26, the advance figure for seasonally adjusted initial claims was 383,000, an increase of 10,000 from the previous week’s revised figure of 373,000. The 4-week moving average was 374,500, an increase of 3,750 from the previous week’s revised average of 370,750.

If we concentrate on the four week average we see that it is increasing again and that the pattern is consistent with some growth but not what was promised. As I type this I am not aware of the monthly employment report due out later but up to it we are seeing a consistent pattern of disappointment.


This morning we received the latest official purchasing managers index for China and it came in at 50.4. So on a scale benchmarked at 50 not much of it and indeed much less than April’s reading of 53.3. The HSBC version has been recording contraction for a while now (7 months) and currently reads 48.4.

We can add to this various reports that China has reduced purchases of various raw materials which is quite a contrast to its previous policy of stockpiling them. We know that electricity consumption growth slowed in April and that it has proved to be a good predictor of future economic growth.

I do have form in this area

Back on December 12th last year I suggested this:

"So if we look at the world right now we see that there is a danger of an economic slowdown in 2012 and that inflationary pressure has abated somewhat. This gives an opportunity for a policy response in India and further responses in China (she cut bank reserve requirement on November 30th). They should take it."

Okay so what about India?

This week we learnt that economic growth slowed to 5.3% on an annualised basis in the first quarter of this year. Not only is this down from the previous 6.1% but it is also the weakest rate for nine years.

Today’s manufacturing PMI report confirmed this view of an economy which is still growing but is also slowing as it came in at 54.8.

And the rest of Asia?

And let me give an addition to the theme for manufacturing purchasing managers indices in South East and East Asia. South Korea 51, Taiwan 50.5, Vietnam 48.3 and Indonesia 48.1. Not much sign of South Eastern Tigers helping to save us there….


We know that there are serious difficulties in several parts of Europe and in particular amongst members of the Euro area. Last Thursday (May 24th) I discussed the weak survey reports that had been released and today we have seen them in essence confirmed as data from later in the month for manufacturing has been added:

Final Markit Eurozone Manufacturing PMI at 45.1, lowest reading since mid-2009

So a marginal improvement on the original 45.0 but the overall message of contraction remains the same. And this bit of the unemployment release from Eurostat caught my eye:

"Compared with April 2011, unemployment rose by 1.932 million in the EU27 and by 1.797 million in the euro area."

In a recovery unemployment is supposed to fall not rise! And as the immediate future looks grim we seem (sadly) set to see it rise further. Back on the 24th of May I pointed out that Eurocrats were waffling about economic growth and talking about their measures to achieve it. I hope that they are reminded of this at future press conferences and asked where it is.

The UK

Blighty has had a weak run so far in 2012 and the latest survey data out this morning is hardly going to improve it:

At 45.9 in May, down from 50.2 in April, the seasonally adjusted Markit/CIPS UK Manufacturing Purchasing Managers’ Index® (PMI®) fell to its lowest level for three years and below the neutral 50.0 mark for the first time since last November. The headline index fell by 4.3 points over the month, the second-steepest fall in its 20-year history.

Ouch! So we find ourselves in a not dissimilar pattern to the Euro area if this is sustained. And looking into the detail we cannot just blame the Euro area as domestic orders were also weak.

So I ask again what happened to all the economic growth?

Continue reading…


More on Mindful Money

US economy grows slower than previous estimates

Is the dollar a safe haven?

How to survive the Eurozone apocalypse

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22 thoughts on “What happened to all the economic growth that we were promised for 2012?”

  1. JW says:

    Hi Shaun
    Is it not correct to view stock markets as surrogate casinos? Their relationship with the real world has surely completely ended? All that electronic money seeping out from commercial banks due to endless QE has to go somewhere. Al I have read recently is the latest push to infer that ‘everyone’ should get out bands and back into equities. I surmise that as soon as the gullible retail investors do this we will see an enormous sell-off later.

    So the gambling continues for the benefit of few, whilst the real world ( mainly western/Japan) is mired in the public consequences of any and all loses, whether that be through unemployment, lower real wages, increased taxation, less services or slow leakages through inflation ( real price increases, not manipulated statistics).

    1. Anonymous says:

      Hi JW

      I assume that you meant bonds and not bands! As to the investment advice I agree that many government bonds do look expensive the catch then is where else do you go? If you have had shares in Spain or elsewhere recently and have done well good luck and well done but that is very different to buying at these new higher levels.

      I found the Spanish bond market intriguing as we have returned to where we were last January but what you have made me think of checking is the IBEX 35 too and guess what?

      1. JW says:

        Ah yes, identical.
        I wonder how much of share movements is now due to high speed algos?

  2. pavlaki says:

    Shaun, I am glad you are around to inject a dose of reality as I was beginning to think I was missing something in all this Europhoria! I find it odd that the forex markets consider data that is not quite as bad as they expected as a sign to boost the Euro in such a dramatic fashion. I am no forex trader but I see no reason to be so bullish about the Euro with all it’s underlying problems (of which you have highlighted some significant ones above). The real life situation on the ground in Greece is dire indeed and I would not be surprised to see political upheaval soon. It seams to me the fact that things are getting worse at a slower rate is now the new ‘optimistic outlook’!

    1. Anonymous says:

      Hi pavalaki
      With apologies to any pygmies reading this in the “currency wars” we are seeing a height contest amongst pygmies especially now that a currency you used to be able to fall against -the Japanese Yen- is now falling too.

  3. Anonymous says:

    Spain’s export performance enhancement is from a very low base. But then there are other countries rather near to here that have the same problem and share the issue that most of their high value exports are done by companies that remit their profits (and thus taxes) elsewhere. The car and commercial vehicles industries come to mind.

    Barroso is just another PR merchant with his eye on the very long term. Anyone believing him is likely to be in a very small minority.

  4. James says:

    Very interesting as ever, Shaun.
    There seems to be a complete breakdown in so many areas at the moment:
    1. between the power of politicians and the electorates. I now see that the Garmans think it “blackmail” and “dangerous” to offer a referendum on the EU;
    2. Between the markets and reality, as you say. Whether equities are being pushed higher by QE or other technical factors, I do not know. It is, however, obvious, that they are not following reality. You could say that this is because markets look forward, not backwards, but there is precious little sign of a recovery as far as I can see, except in politicians’ soundbites
    3. Between the rhetoric and the situation on the ground. You have to pinch yourself to realise that the Greeks and Spanish are fighting for the top unemployment figures, both being OVER 25% and over 56% in Greece for youth unemployment.
    4. Between what is happening to government debt and spending (increasing) and reporting of either (decreasing, under control, just two more years of austerity etc).
    It is almost as though the news is so bad that we have become inured to it and just want to hear good news. Would anyone have dared to think of government borrowing at these levels or QE even five years ago?
    ps If you’d like a great analysis of the UK debt/deficit position, this week’s private eye has a very entertaining summary…

    1. Anonymous says:

      Hi James
      If I take your point 2 and agree that markets are supposed to look forwards I wonder what it is they think they are looking forwards too? I have some thoughts but would be interested in what readers think about this….

    2. HarryA says:

      Fluctuations in bond yields cannot mask the impact a 25% unemployment rate has on an economy. Short-term investors can make a fast-buck riding the partisan views of Banks and Politicians. However long-term investors – the people, pensioners or capital suppliers of last resort will lose out.

      Japan’s stagnation existed despite a current account surplus. The economy stalled but never suffered as much as Spain or Greece will. But how have equity investors been rewarded there? Even bond investors have made negligible returns, boosted by the currency effect.

  5. Drf says:

    Hi Shaun,

    “However the economy in Spain is showing an increasing dichotomy between the financial side and the real economy.” Is this not the principal problem which all Western economies have now? It is just that some are more advanced on the oblique slide to oblivion than others!

    1. Anonymous says:

      Hi Drf
      I can only agree with that.

  6. Rods says:

    Hi Shaun,

    Another excellent article.

    We know bond markets are being extensively manipulated by governments. I have read recently many economic commentators suggesting that savers should be buying shares as a hedge against inflation and 2-3% returns from dividends. With stock market volatility and declining profitability in Europe, I’m sure many people are going to get their fingers burnt here. Are share prices likely to continue rising in the long term as a hedge against inflation, if the Euro countries continue to be mired in an economic recession / depression with declining company profits? Are dividends going to continue at the current rate? Where many countries over the next 10 years are going to have to face a sovereign debt crisis, is the stock market going to be mired in a lost 10 years in Europe and a lost second decade in the UK?

    I think the problem for many people and business that have savings, is where do you invest them to get a return above inflation? In these uncertain economic times there is no easy answer to this question! I guess the best you can manage is a range of different investments, knowing you are going to get burnt on some of them.

    The next major crisis is going to be pensions in the UK, Gordon Brown’s £5bn a year pensions tax grab has been a disaster, so we have now gone from the best funded in Europe to the worst. Many pension funds I’m sure are currently contracting where the fund fees exceed and returns. So funds and historically low annuities will mean the expected pension is no longer there.

    All we need is some sovereign debt crisis QE induced hyperinflation and many people savings and pension funds will be wiped out!

    Where I think the US is now at the beginning of the end of their economic problems with cheap shale gas boosting investment and rescuing their economy. I don’t think that after 5 years of recession / depression that Europe is at the end of the beginning yet, with the beginning of the end no where in sight. With the desperate situation in Greece and Spain, is this going to lead to a third major European political crisis in 100 years?

    1. JW says:

      Hi Rods

      Agree completely about the bond/equity ‘spin’. Its just about return of your capital.

      I think the US situation is not nearly as good as portrayed. The only increases in ’employed’ since 2008 are in the over-55 are group, and they are predominantly part-time. Wages are still slipping. Shale gas is a help no doubt, but whether its enough to offset the rest is debatable.

      However the demographics in the US are so much better than the EZ in general.

        1. HarryA says:


          Do those deficit percentages include debt interest? 10yr USTs at sub-2% is not sustainable…

  7. MW says:

    Shaun, interesting article. Hate to nit-pick, but the ‘don’t believe anything until it’s officially denied’ was from Jim Hacker, not Sir Humphrey……

    1. Anonymous says:

      Hi MW and welcome to my part of the blogosphere

      You are entriely correct so apologies. However in checking I reminded myself of some very funny other ones so thank you! Here is one for you.

      “Two kinds of government chair correspond with the two kinds of minister: one sort folds up instantly and the other sort goes round and round in circles.”

  8. Midge says:

    Almost gone unoticed that the greek situation has led Cyprus needing a bailout.Belated congratulations on your RPI campaign victory.

    1. Anonymous says:

      Hi Midge.

      Thank you. As to Cyprus it looks as though her banks have been wiped out, I guess as ever nobody will be to blame!

  9. John says:

    Aren’t we going to see contradictory situations like this until the german elections are over? German demands will be muted for fear of inflaming home politics. They will allow situations to develop further away from the line they have been taking over the past several years. Once the elections are over, I expect to see the true german position in the EZ to be reasserted gradually. However, events, like the US budget deficit, could always create waves.

  10. Anonymous says:

    An important aspect of economic activity surrounds the ownership of existing assets and speculation upon their future values. In Ricardo’s time it was agricultural land. Today it is financial assets and the process of financialisation. and the fees that can be charged for peddling these things.

    As opposed to investment to 1) meet needs 2) generate productive capacity, jobs and incomes.

    But the relationship between these two things is the most fascinating aspect of economics.

  11. Anonymous says:

    Spain, a country of carefully cultivated paradoxes. The elite can see their long-established privileges melting away as the country’s egregious scams are revealed. Political corruption has reached the point where even the socialist opposition leader has called for a halt, demonstrating impressive hypocrisy. In truth, Spain is riven by endemic corruption that affects all parties. The working man, once protected by the strongest restrictions on redundancies and automatic pay rises with inflation coupled to a very decent state pension scheme, sees those protections beginning to loosen. In a country that claims 25% unemployment, the workforce is nervous and angry. Half the kids are out of work, or at least say they are, and the best ones are fleeing to Germany. Nobody is doing anything about the massive problem of at least 1m unsellable new houses and the catastrophic amount of bad debt that has been the direct result in the local savings banks. The bad debt still has not been admitted publicly, but in private, figures of around €1tn are discussed. That really is a lot of money, around €21,000 per Spanish resident. Construction continues apace, financed by who knows what.

    Spain is on the autopilot and approaches the famous cliff. No doubt, like the US, it will find a way to smooth things over for a while longer, but the maths of the situation will ultimately catch up with Rajoy. Shouting about how wonderfully exports are doing is not the answer, they are better than they were but they are nowhere near enough to create the growth needed to sort out the economy. Making a start on demolition of the half-completed housing projects would be a good idea, but for the triggering of nasty consequences for the banks and their hidden bad debts.

    Oh, well, the sun will be back in a couple of months, at least in the south. You can rely on that if nothing else.

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