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.”

10 Comments
  1. Anonymous says

    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

    1. Marshall Auerback says

      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?

      1. Anonymous says

        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

      2. Anonymous says

        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

        1. Marshall Auerback says

          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.

  2. Anonymous says

    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

    1. Marshall Auerback says

      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

      1. Anonymous says

        Best to you as well Marshall !

Comments are closed.

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