FTSE 100
Dow Jones

Friday, 23 October 2009

A new British record?

A funny thing happened on the way to the news desk this morning at the BBC. The recession was due to end, they asserted confidently. Indeed they went on in the following vein:

Figures due later on Friday are expected to show that the UK economy grew slightly from July to September, meaning the recession is over.

The figure for Gross Domestic Product (GDP) from the Office for National Statistics (ONS) is likely to show the first economic growth since early 2008.

But analysts have said the result will be close and that the economy may even have continued to contract.

GDP measures the total amount of goods and services produced by a country.

The figure at 0930 BST is expected to show growth of between zero and 0.2%.

But as it turned out they (whoever they are) were wrong, because at 9.30 we got this:

The UK economy unexpectedly contracted by 0.4% between July and September, according to official figures, meaning the country is still in recession.

It is the first time UK gross domestic product (GDP) has contracted for six consecutive quarters, since quarterly figures were first recorded in 1955.

But you have to admire their optimism because they added

"But the figures could still be revised up or down at a later date, because this figure is only the first estimate."

No doubt somebody on the newsdesk is hoping for 0.4% upwards adjustment, ignoring the fact that this is a greater amount than the amount by which they were willing to declare an end to the recession a few hours earlier.

But leaving aside the blatant government bias, the fact that the UK, unlike Germany, France, Australia, Japan, Hong Kong and maybe the US, is mired in recession should have been obvious from the recent data on tax revenues. Despite an increase in government spending of 1.25% of annual GDP in the quarter, (up 5% on an annualised basis), the fact that we have a 0.4% drop in total GDP implies a 2% drop in non-government consumption in the quarter or 8% on an annualised basis.

So we have government borrowing an additional 15% of GDP to stimulate the economy and yet after an unprecedented 6 quarters of recession the "real" economy is still shrinking by 8% per annum. Take away that 15% of GDP that wouldn't be there in a healthy economy with a balanced budget and instead of the 5.9% fall peak to trough there would be a 21% fall. Add in a couple of years inflation and you have a 25% drop in sustainable real terms GDP.


The King of Wrong said...

I was halfway through the original story in a forgotten tab when I got to the "figure at 9:30" part and decided to check (in a new tab).

Oddly enough for the BBC, the old version is still there. Normally they rewrite the story in place so that hitting refresh purges the old one - F5 revisionism, I suppose.

Alfred T Mahan said...

Don't forget the multiplier effect of government spending - borrowing 15% of GDP and spending it will result in an apparent bigger increase in GDP as the cash trickles out beyond the first recipients. The figures are much worse even than you suggest.

This also affects the level of spending at which the government will be able to balance its books - a possibility which looks more and more remote, whoever is in power. Does anyone believe that Cameron will cut by 30% or more? That's what's clearly needed, but I don't see it happening. The only alternatives are massive inflation or overt government default. I'd bet on crippling inflation, myself.

Alex said...

I honestly believe that the value of such multipliers are grossly overstated. We no longer live in the same economy as Keynes.

First of all, of every £1 spent in the private sector, 50% finds its way back into government, and second 50% of discretionary income is spent on foreign made goods and services, so the £1 stimulus only gives rise to an extra £0.33 (1/4+1/16+1/64 .. etc).

Demetrius said...

Multipliers, I did a longish post on this yesterday Thursday, 22nd. Times have changed since Keynes wrote up his theory in the mid 1930's.

Alfred T Mahan said...

Demetrius and Alex - I fully accept that the multiplier is not what it once was.

Alex, if my maths are correct the sum of your series is £0.50, not £0.33, but even on your figures an extra 33% of 15% of GDP is itself 5% of GDP to add into the figures on your original post. This would give a 30% drop in sustainable GDP, which I would say is much worse than 25%.

At a multiplier of 1.5x, which I think is correct on your assumptions, the drop in sustainable GDP is 32.5%.

I think in essence we're not really in disagreement, though - the figures are appalling.

Alfred T Mahan said...

Alex - just done my maths again. You're right and i'm wrong. Apologies!