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.
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?
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