Flatlining. Still.
This is turning out to be one of the slowest recoveries on record. In a sense this should be no surprise. Recessions that originate in financial distress take much longer to work through the system and recovery is slower. That's in part why such a rapid pace of deficit reduction was always going to be damaging to growth, as I have repeatedly warned.
Indeed, while the UK may not (yet) have met the technical definition of double dip recession, basically there has been no at all growth in the UK economy since September 2010. Since then we have seen three quarters of falling output and just two quarters of economic expansion. The economy is at best flatlining, and this is a slower recovery than even that seen after the Great Depression of the 1930s.
The government - and the Governor of the Bank of England - maintain that the eurozone crisis has affected the demand for the UK's exports and that otherwise the economy would have been 'on track'.
But that argument doesn't stack up. In fact, net trade has actually boosted growth to some extent (although admittedly not by nearly as much as hoped - in part because we had allowed our manufacturing base to shrivel up so much). Rather, the big factor pulling down economic growth has been consumption spending, which accounts for something like two-thirds of gross domestic product.
Consumer spending dropped heavily in the recession over 2008 and 2009, picked up somewhat from late 2009 into 2010, then fell again until the final quarter of 2011.
Consumers have suffered the biggest fall in real incomes for decades - maybe even since the 1920s. Inflation has outstripped wage growth, driven by imported factors such as higher energy costs and the depreciation of sterling, as well as the domestically-generated rise in VAT.
With inflation now falling, the hope is that consumers will start to feel better off later this year and that higher consumer spending will eventually drive recovery.
But at best that will take some time, and at worst is vulnerable to an oil price spike. And despite hopes of recovery at the start of this year, the OECD has just said that the UK is after all heading back into recession. It said that the UK will be one of the slowest of the world's large economies to recover in the first half of 2012.
The gloomy outlook was reinforced recently by revised figures from the Office for National Statistics, which reported a bigger drop in economic output in the final quarter of 2011 than previously thought, with a 0.2% output drop revised down to a 0.3% fall.
The latter matched figures just produced by the OECD, which reported an annualised rate of decline of 1.2% in the final quarter of 2011, and an estimated 0.4% decline in the first three months of 2012.
That would put the UK back into double dip recession. With 85% of government spending cuts yet to kick in, I still wonder where the growth is going to come from.
Professor David Bailey works at Coventry University Business School
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"Inflation has outstripped wage growth, driven by imported factors such as higher energy costs and the depreciation of sterling, as well as the domestically-generated rise in VAT."
No, no, no.
I know you can't seem to accept it but inflation in the UK is not 'driven' by sterling depreciation, or higher energy costs, or the Jan 2011 VAT rise.
Inflation is caused by money printing, by the BoE, the Fed and the ECB central banks, amounting to anywhere from $8-25 trillion equivalent, since 2008.
Sterling has not depreciated: up ~10% against the euro since early 2010, £1:€1.08 to £1:€1.20, and basically flat against the US dollar since May 2009, at around £1:$1.55-1.60, yet CPI inflation remains higher in Feb 2012 than Feb 2010, and is still nearly double the BoE target(RPI 3.7%) and above all the G7 and most of the OECD.
Higher energy costs are not a root cause of inflation. Higher energy costs are caused by excess liquidity, through unprecedented in human history money printing.
The Jan 2011 VAT rise to 20% has fallen out of UK inflation data for the last two months already, and yet official inflation rate is still at 3.4% and rose 0.6% alone between January and February, over 7% annualised.
The BoE is intent on monetising debt through its open-ended QE programme. The banks will not mark their 'assets' to market value. Money will be debased until all the banks' bad gambling debts( notional derivative contracts into the hundreds of trillions of dollars) are hyperinflated away. Savers, those on fixed-income, those without access to bank-funded hedge fund speculation returns, that is 99% or so of the population, will and are being destroyed through real inflation running at around 20% for life staples.
Please drop the 'party line' on the causes as to inflation. It's about as credible as UK 'democratic government'.
An interesting balancing of the argument there from Mr Kelly!
Paul Kelly, you are spot on.
Professor Bailey, I'm afraid yet again you don't seem to know what you're talking about, so why don't you give your political agenda a rest?
Regards,
Srutineer.
Far from it, Mr Scrutiner. This isn't any 'party line' - I have been pretty critical of all parties' policies, especially on industrial policy, or the lack thereof, and have been highly critical of the last govt for letting the economy become so unabalanced.
And if inflation was SOLELY driven by printing money as our expert friend Mr kelly seems to suggest then why has inflation been falling of late? (down from 3.6% to 3.4% in Feb). Indeed even monetarists who believe a link between money supply and inflation point to the fact that the money supply has been falling for much of the last 2 years, and agreed with QE.
The real point in this blog is that even if we avoid double dip - which I hope we do - the economy is still flatlining. The government still doesn't have a growth strategy, sadly.
David,
please! Your rebuttal of inflation not being caused by money printing rests on a government statistic?!
There are lies, there are damned lies and then there's CPI/RPI, to coin a phrase.
Every man and his dog knows UK's unemployment statistics have been continually and increasingly fixed for the last 30 years. What apparently is less known, even to business school professors, is 'official' inflation stats have also been fixed, increasingly so, for years, to the point of absurdity, for the average citizen's 'shopping basket', their real cost of living.
You do know about 'weighting' and 'hedonics', right, and their use in frigging inflation stats, to name but two methods or ruses used by govt. 'official' statiticians'?
Give me a break, with your talk of "inflation been falling of late". I told you, even with the fixed official figures consumer prices rose 0.6% between January and February. Then there's producer prices (from *official* sources(ONS)):
'In the year to February 2012 the output price index for home sales of manufactured products rose 4.1 per cent, compared with a rise of 4.0 per cent last month.
Between January and February the output index for home sales of manufactured products rose 0.6 per cent.
This is the largest monthly increase since April 2011, when the index rose 1.1 per cent.
In the year to February 2012 the output price index excluding food, beverages, tobacco & petroleum rose 3.0 per cent, compared with a rise of 2.4 per cent last month.
In the year to February 2012 the total input price index rose 7.3 per cent, compared with a rise of 6.6 per cent last month.
Between January and February the total input price index rose 2.1 per cent.'
So, UK factory gate prices rose 0.6% between Jan and Feb, the fastest rate since Apr 2011, and input prices - raw materials and fuel/energy - rose 2.1% in the same period. 2.1 per cent, in one month! And you say inflation is falling 'of late'?! You do understand the concept of a lag between input price rises showing up in consumer prices?
Sorry David, your argument and supporting data are laughably wrong. The UK economy is not 'flatlining'. It is in a continual depression, since at least 2008, if you don't count the Ponzi period from at least back to post-9/11. The only thing that is giving the appearance of flatlining rather than 30s-style slump is trillions of printed pounds, dollars and euros, the one trillion+ euros under LTRO2 just the latest round by the ECB.
If you really think inflation is not soley caused by banks deliberately expanding the money supply, why did all assets sell off yesterday when the US FOMC hinted QE3 was not imminent? The only thing 'driving' this 'recovery' in the US and flatlining rather than depression(min. -10% GDP) in the UK is money printing, money handed to the main banks and primary dealers, goosing stock markets, commodities and sovereign debt issuances, and of course causing real inflation running at 15-20% annually for ordinary people.
I can't figure out why you can't see/accept this. You're sufficiently intelligent to see it, so maybe you're just another on-side, 'party-line' man, like so many other media business pundits and academic 'experts' currently. By the way, when I said 'party line', I meant party with a small 'p'. I did not mean to imply you touted for any particular party, with a large 'p'. Any half-intelligent person knows that all the 'democratic' parties are the same and act as puppets, and all answer to the same puppet master, the bankers.
Prof Bailey,
As I have said to you before I respect you for at least coming back to reply to comments that are posted on your blogs. It does at least demonstrate that you are passionate and believe in the importance of debate and counter arguments.
As for the factors which cause a rise in inflation, I agree it is due to many factors, however you cannot deny that QE is the single biggest factor.
You mentioned that the current Government doesn't have a growth strategy, and I agree they don't. However, nor does the moronic Labour lot. When I listen to the likes of Miliband, Balls, Byrne, etc, the only thing I remember is that these idiots were in power for 13 years. They destroyed the manufacturing base, increased the tax burden on every working person and pensioner, grew the public sector to an unsustainable level, wasted vast sums of money on illegal wars, etc. No wonder the UK is bankrupt and no one has any money in their pockets to spend. (Apologies for the rant!)
One thing I'm absolutely certain about is that the problem is not going to be fixed by throwing more public money at it.
It will take many, many years to recover the situation, and if I am going to be honest, I don't think we ever will. I see the BRIC economies being the major players, and the UK will just be an insignificant bit player.
Our politicians and public sector leaders are just too incompetent and dishonest. They are only interested in getting the power so that they can feather their own nests. If you need a clear example of this, then just take a look at the idiots that are putting themselves forward to become the elected mayor for Birmingham.
Regards,
Mr Srutineer.
Hi Scrutineer. Thanks for responding. There are several points you make that I agree with. Where we differ I think are on the following (unless I’ve misunderstood in which case correct me):
1. QE isn’t ‘throwing public money’ at things – rather it’s the central bank printing money (which the govt is NOT liable for – as the money supply ahs been falling. In fact if you think there’s a link between the money supply and inflation/deflation you should welcome this, unless that is you actually want deflation (not pretty – look at Japan);
2. I see a more positive role for the state than you especially when other drivers of demand in the economy are having to pare down private debt (deleveraging). So I think that cutting the deficit so quickly, kills growth. And the BRICs you mention all have big roles for the state. I guess moving beyond this issue, maybe we don’t have a civil service with the capacity to ‘do’ industrial policy like the Germany, the US, Japan, or even China.
Anyway, as I said, thanks for the challenge. I appreciate the debate.
Further confirmation today of the disastrous consequences of QE:
http://www.ons.gov.uk/ons/dcp171778_262338.pdf
So, £375,000,000,000 funny-money pounds and hundreds of billions of taxpayers' pounds handed to the bankers to 'save the financial system' later and UK is in the pound seats when it comes to world-class, eye-watering stagflation: highest inflation amongst the leading industrialised countries and a manufacturing sector in double-dip contraction - not 'flatlining'.
Contrary to the good professor's diagnosis this is not an argument for even more 'pump priming' to close the economy's capacity utilisation gap, save us from deflation(God forbid!) or some such other witch-doctory, claptrap, pseudo academic thesis, but rather the inevitable and lamentable outcome of printing money, that is, counterfeiting the coinage of the realm - a treasonable act - deliberate debasement of the general populace's wealth, handing said phony money to crony friends in the City, who employ it speculatively to ramp up asset prices, not lending to real wealth-generating productive enterprises, thereby further increasing the cost of living for the population, as vividly represented by £7/gallon fuel price, at a time of collapsing real demand. see: http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=A103600001&f=M
Your country is so frigged when it has leading analysts and commentators knowingly advocating such ruinous policies. Stop the money printing; make the 'too big to fail' banks go bust; let asset prices fall, especially UK's Ponzi house prices; stop creating money out of thin air as a debt with interest; spend the money into existence to support real productive capacity as required by the real economy; take your country back from the power of the purse and its numerous agents of persuasion. Do it before you end up as Greece, with people having to kill themselves to get attention.