UK economic data show worst contraction on record
In the just finished second quarter of 2009, the UK economy was contracting a massive 5.6% from the year ago period. This is the worst performance since records began in 1955. What’s more, the data surprised to the downside, with the quarter-on-quarter contraction coming in at 0.8%, much worse than the 0.3% contraction which had been expected. Yet, somehow markets are shrugging this data off and the FTSE is up for the day.
The Telegraph has some wonderful graphs in a slideshow attached to their article on the story. See their story here. It shows that the depths of recession in the UK are behind us at this point, as the economy shrank at a much faster 2.4% in Q1. Nevertheless, the data in the graphs should leave no doubt that the UK is still in recession despite some speculation that it had left recession late last quarter.
The Guardian reported the data this way:
Britain’s economy contracted by a record 5.6% over the past year as output fell for a fifth straight quarter, the government revealed today.
Dashing hopes that the steepest decline in growth since the 1930s might be nearing an end, the Office for National Statistics said gross domestic product fell by 0.8% in the three months to June.
The size of the drop surprised the City, which had expected only a 0.3% decline following recent signs of a pickup in the housing market and strong growth in high street spending.
Sterling dropped sharply after the data, losing a cent against both the dollar and euro to $1.6450 and €1.1577. Mark O’Sullivan, director of dealing at Currencies Direct, said the poor figures had sparked a sell-off of sterling and it is likely to remain under pressure: "The political uncertainty in the UK until the next general election remains a real worry for investors. Many will stay away, particularly with the Conservatives keeping their policies so close to their chest. This could mean further bad news for sterling."
Shares, enjoying their tenth successive day of gains, appeared to shrug off the news, however. The FTSE 100 was up almost 30 points at 11am, at 4589.28.
Describing the figures as "shockingly bad" Vicky Redwood, UK Economist at Capital Economics, said they "firmly dash any hopes that the UK had already pulled out of recession." Getting the economy back on track "looks likely to be a long hard slog," she said.
Ahead of today’s data, some economists had even predicted that the UK could post its first positive growth since early 2008, and the size of the decline prompted immediate speculation that the Bank of England would be forced into fresh emergency action to kick-start activity.
You can bet the Bank of England will continue to be very accommodative for the foreseeable future. former MPC member David Blanchflower told Bloomberg that would be his recommendation going forward.
Former policy maker David Blanchflower said in an interview on Bloomberg Television yesterday that the economy may not be through the worst, and the central bank risks stifling the recovery were it to raise rates or reverse the bond-purchase program prematurely.
“My worry is that the tightening comes too soon and people kill off any recovery that’s coming,” he said. “It’s very early days to say that you know the endgame is even in sight.”
The UK banking system is not acting in the role that it should be as a support mechanism for UK industry, but acting in its own self-interest. Government are their partners here as they let the system do as it wishes. Indeed, the two together are creating more economic harm than anything else. The sooner the Conservatives get into power and to grips with this manifestation the better. Labour’s inactive mode is literally crucifying UK industry. When history writes the story of Labour’s 13 years in power, it will go down as the most disastrous for present and future Britain. For we are more in debt now, with on and off balance sheet debt, than we were after two world wars. The truth is that Labour has bankrupted the UK and in little more than a decade from taking office. Now worse is to come and that will be their great legacy for the people of this once great country.
Dr David Hill
World Innovation Foundation
Switzerland & UK
In a message dated 1/24/2010 04:40:51 Mountain Standard Time,
writes:
The UK banking system is not acting in the role that it should be as a
support mechanism for UK industry, but acting in its own self-interest.
Government are their partners here as they let the system do as it wishes.
Indeed, the two together are creating more economic harm than anything else. The
sooner the Conservatives get into power and to grips with this
manifestation the better. Labour’s inactive mode is literally crucifying UK industry.
When history writes the story of Labour’s 13 years in power, it will go
down as the most disastrous for present and future Britain. For we are more in
debt now, with on and off balance sheet debt, than we were after two world
wars. The truth is that Labour has bankrupted the UK and in little more
than a decade from taking office. Now worse is to come and that will be their
great legacy for the people of this once great country.
The UK has a structural problem insofar as it has placed so many of its
eggs in the financial services basket, which is inevitably going to contract
as a share of GDP over the next few years. But it is not going to go
bankrupt.
Some paint a morbid picture of the UK being “Reykjavik on the Thames”.
This is nonsense, as is the notion that Her Majesty’s government needs to tax
the bankers more heavily in order to fund its expenditures (we make the
same mistake here in the US as well, so it’s not a uniquely “British
disease”). In a country with a currency that is not convertible upon demand into
anything other than itself (no gold “backing”, no fixed exchange rate), the
government can never run out of money to spend, nor does it need to acquire
money from the private sector in order to spend. This does not mean the
government doesn’t face the risk of inflation, currency depreciation, or
capital flight as a result of shifting private sector portfolio preferences, but
the budget constraint on the government, the monopoly supplier of
currency, may be different than we have been taught from classical economics, which
is largely predicated on the notion of a now non-existent gold standard.
The UK Treasury cuts you a benefits cheque, your cheque account gets
credited, and then some reserves get moved around on the Bank of England’s balance
sheet and on bank balance sheets to enable the central bank (in this
case, the Bank of England) to hit its interest rate target. If anything, some
inflation would probably be a good thing right now, given the prevailing
high levels of private sector debt and the deflationary risk that PRIVATE debt
represents because of the natural constraints against income and assets
which operate in the absence of the ability to tax and create currency. The
taxation of the bankers might well have excellent social justification
underlying it (i.e. the “polluter pays” principle), but “funding” the UK’s
fiscal expenditures is not one of them.
In addition to ideological opposition to high levels of government
spending, many critics of the UK government’s approach display an ignorance of
simple financial balances accounting. A high level of private sector debt
delinquencies and defaults suggests private debt burdens got too high relative
to private income flows. Liquidating or restructuring existing private debt
then makes more sense than getting banks to loan more money to the private
sector. Private debt liquidation, which is the Austrian solution, can take
the whole system down if enough people try to do it at the same time, or
if a large enough institution does it in a disorderly fashion. As Irving
Fisher noted, attempts to pay down debt can lead to higher real debt burdens
as forced asset and product sales drive prices into the ground. We had a
taste of that with the Lehman bankruptcy. Debt liquidation might form some
part of the solution when seeking to eliminate private sector indebtedness,
but it cannot be the main course.
If not, then the private sector needs to be in a position to net save and
pay down debt. That cannot happen unless some other sector is willing and
able to deficit spend. Some of this can be achieved through increased
exports, although if every country sought to depreciate their currency in the
manner of sterling, the result would likely be a further collapse in trade,
since “beggar thy neighbour” devaluations mark protectionism by another
name: two potential candidates, the government sector or the foreign sector.
Given the contraction in foreign demand and rapidly diminishing trade
flows, that leaves government to deficit spend if the private sector is going to
net save. This is not high Keynesian theory – it is double entry book
keeping, which we have been doing for 7 centuries now. Think T accounts, 2,
sides to every transaction, rather than micro household behavior, and you will
avoid the more obvious fallacies of composition. At the lowest level of
manufacturing capacity utilization in post WWII history, and a rapidly rising
employment rate of 8% and the “hyperinflation” perspective doesn’t seem
very relevant now, does it?
Inflation will rise to double digits within the next 5 years as the poor man of the West struggles with all the debt and the paper money that the government has printed and will print. Sterling will inevitably lose significant value against most other countries. I predict that there will be a sense of no hope appearing and all manner of things will be attempted by government but producing little. We are all therefore aware of the imbalance with service industries and a few of us have been telling government this for the past 15 years (Conservatives before Labour came into power and created unparalleled economic national damage). Unfortunately government never listens and no matter what they do now it will be a very long and hard struggle for the UK to attain any meaningful growth. Indeed many leading economists say that it will be the early part of the 2030s when we reach parity of what we were before the financial bubble burst. The UK’s only possibility of getting out of its mess quicker is to start basing its economic strategy on new high tech industries. For we have the creative talent but where government again does not know how to tap into it. I am not talking about our so-called illustrious universities or corporate centres of excellence here but the British inventors who work outside these confines. The WWW, jet engine, email, IC, personal computers, television, fuel cells and are all examples of this. No matter what happens on the present economic path Britain is in for many years of economic hardship. Indeed even today it was cited in a national newspaper that our standard of living in 2010 is that of 2005. Things will get increasingly worse I can tell you no matter what the texts books tell us. We are definitely in un-chartered waters.
Dr David Hill
World Innovation Foundation
Inflation will rise to double digits within the next 5 years as the poor man of the West struggles with all the debt and the paper money that the government has printed and will print. Sterling will inevitably lose significant value against most other countries. I predict that there will be a sense of no hope appearing and all manner of things will be attempted by government but producing little. We are all therefore aware of the imbalance with service industries and a few of us have been telling government this for the past 15 years (Conservatives before Labour came into power and created unparalleled economic national damage). Unfortunately government never listens and no matter what they do now it will be a very long and hard struggle for the UK to attain any meaningful growth. Indeed many leading economists say that it will be the early part of the 2030s when we reach parity of what we were before the financial bubble burst. The UK’s only possibility of getting out of its mess quicker is to start basing its economic strategy on new high tech industries. For we have the creative talent but where government again does not know how to tap into it. I am not talking about our so-called illustrious universities or corporate centres of excellence here but the British inventors who work outside these confines. The WWW, jet engine, email, IC, personal computers, television, fuel cells and are all examples of this. No matter what happens on the present economic path Britain is in for many years of economic hardship. Indeed even today it was cited in a national newspaper that our standard of living in 2010 is that of 2005. Things will get increasingly worse I can tell you no matter what the texts books tell us. We are definitely in un-chartered waters.
Dr David Hill
World Innovation Foundation
I’ll take that bet with you. I doubt there will be any significant
inflation in the UK. Take a look at Japan. With triple the cumulative deficit of
the US, Japan continues to have one of the world’s strongest currencies,
and they continue to suffer from a lack of domestic demand. They have also
demonstrated that even severe downgrades and the G20’s highest debt doesn’t
materially alter the term structure of rates and don’t alter the ability
to make payments on demand for the issuer of a non convertible currency.
And where’s the inflation? Japan also continues to face a severe shortage
of aggregate demand that begs for a major tax cut if they wish to support
higher levels of domestic consumption. That’s what lies ahead for the UK, I
fear.
Marshall
Are you seriously comparing the Japanese economic make-up with that of the UK. I would have respectfully thought that anyone could see that Japan’s economic industrial/service base is different? Also they have substantial reserves and export twice as much as the UK (Japan being the 4th largest in the world). Added to this Japan’s industrial workforce is 28% and if you can believe it, the UK’s is 16%. The UK’s external debt is also 4 times that of Japan and remember Japan is next to China, a far, far better location to trade with than Britain. But if you wish to base your assumptions on Japan, you respectfully make the same mistake that a great number of leading economists make time and time again where the reliance on history and mixing up of economic bases (not like for like) fools them into a false sense of security. In this respect the vast number prior to the global financial bubble bursting worked with this mindset. I respectfully think that in time you will see the two economies are as different as chalk and cheese. Indeed, you have already alluded to the fact that the UK is unhealthily and heavily dependent upon services (which we have known for several decades). Keep in touch from time to time and we can compare where we are. Then we shall see who wins the bet? But overall I wish that you do win, for obvious reasons!
Dr David Hill
World Innovation Foundation
There are differences, but the fundamental principle is the same. Properly
constructed fiscal policy can solve the UK’s problems, in a manner which it
can’t, for example, in the euro zone, because of stupidly self-imposed
political constraints. I’ll go further and suggest that if David Cameron and
the Tories win the next election (as the polls suggest) and they carry out
their fiscal retrenchment, you will have DEFLATION in the UK, not
inflation.
As my friend Bill Mitchell has pointed out, should government decide to run
a surplus (say spend 80 and tax 100) then the private sector would owe the
government a net tax payment of 20 dollars and would need to sell
something back to the government to get the needed funds. The result is the
government generally buys back some bonds it had previously sold. The net funding
needs of the non-government sector automatically elicit this correct
response from government via interest rate signals.
Either way accumulated private saving is reduced dollar-for-dollar when
there is a government surplus. The fact that it is Japan or the UK that we’re
talking about is irrelevant. The government surplus has two negative
effects for the private sector:
* the stock of financial assets (money or bonds) held by the private
sector, which represents its wealth, falls; and
* private disposable income also falls in line with the net taxation
impost. Some may retort that government bond purchases provide the private
wealth-holder with cash. That is true but the liquidation of wealth is
driven by the shortage of cash in the private sector arising from tax demands
exceeding income. The cash from the bond sales pays the Government’s net
tax bill. The result is exactly the same when expanding this example by
allowing for private income generation and a banking sector.
I think one of the things that the current downturn across the globe has
established – fiscal policy (budget deficits) are very effective and monetary
policy is not.
I am not saying the way that the stimulus packages have been implemented is
optimal or that there hasn’t been any unintended consequences (waste) but
the negatives are relatively minor compared to what would have happened if
the governments had not have acted so dramatically. The Great Depression
wiped out a massive amount of wealth and the lost income during that decade
was lost forever and the lives of many people who lived through it indelibly
etched with failure and poverty.
While the current downturn is still very damaging and costly to certain
cohorts in our communities the fiscal interventions have put a floor under the
freefall and reduced the costs. But it can do more.
Anyway, I’ll gladly take your bet and hope that I’m right as well, because
I have a lot of friends and family in the UK and lived there for many years
(in fact, still hold a UK passport)!
Best,
Marshall
Best to you as well Marshall !