Double Dip Deniers take note: this is going badly wrong. There's still time for a Plan B.
This is an expanded and updated version of my recent column in the Birmingham Post on the UK's recent GDP figures.
"Disappointing" was George Osborne's reaction to the recent GDP figures showing a 0.7% decline in national output in the second quarter. "Shockingly bad" might be a more apt description.
Of course, the fact that GDP fell again shouldn't really have come as too much of a surprise. The Bank of England had anyway predicted that Jubilee bank holidays would negatively impact on quarterly growth.
Factor in dismal weather and an already double-dipping economy (down by 0.3% in the first quarter of 2012 and 0.4% in the final quarter of 2011) and a contraction of around 0.5% was anyway in the offing - as Capital Economics had predicted. But a fall of 0.7% was jaw-droppingly shocking.
Quite a few city analysts and commentators were caught on the hop again (they had expected 'just' a 0.2% drop in GDP) and have been saying that the initial figures are wrong and will be revised upwards.
Er no. Firstly, let's leave aside the fact that generally these 'analysts' are the same people who supported the government's misplaced austerity drive and so would say that the figures are 'wrong' anyway.
Secondly and more to the point, as I've pointed out before in Post columns, the ONS actually has quite a good track record on preliminary GDP estimates, and if anything the figures are as likely to be revised down as up, as we've seen with recent figures being revised downwards. What's genuinely more difficult to square is the message coming from business surveys which give a more positive take on things.
But what's not in doubt is that after the UK's worst post-war recession, its recovery has been more anaemic even than that after the 1930s Great Depression. It leaves UK output still some 4.5% below pre-recession levels (unlike Germany and the US which have surpassed 2008 pre-recession levels), with the UK performing worse than any other G8 country other than Italy, which has been unable to devalue like the UK. In fact, UK growth is worse over the last year than in Spain.
The economy has now contracted by a total of 1.4% over the last three quarters, and before this was anyway flatlining - with four GDP quarterly drops out of the last five and five out of the last seven. At this point after the recessions of the 1990s and 1980s, the economy was rapidly picking up speed. Not this time. Overall, GDP in Q2 of 2012 was 0.8% lower than a year before.
That recent IMF forecast of 0.2% growth for 2012 already looks too optimistic, and the Bank of England's forecast of zero growth in 2012 requires quite strong growth in the latter part of this year which may well not materialise - we may well end up with negative growth in 2012 overall.
The Q2 contraction affected all areas: services (-0.1%), construction (down by a whopping 5.2%) and industrial production (-1.3%). Perhaps the most telling statistic is that the UK economy is now smaller than it was when the coalition came to power in 2010. This is dismal, especially when you consider a base rate of 0.5% and £375 billion of QE so far (and more to come most likely).
In fact, as David Blanchflower has rightly stressed, it's government current spending which has continued to prop up output. Manufacturing has now made a negative contribution to growth in each of the past four quarters.
Construction made the biggest negative contribution in the past two quarters, with declines of roughly 5% in each quarter. As Blanchflower shows (see here) this was largely driven by declines in the value of public housing and non-infrastructure public spending ( down 11% and 17%, respectively, quarter on quarter; and down 18% per cent and 20% respectively, year on year). See also the BBC's Stephanie Flanders here for similar figures.
The Chancellor's line that public investment crowds out private investment looks completely wrong on such trends - in fact the opposite seems the case.
Let's remember that back in 2010 when the coalition came in, there was a tentative recovery underway. The economy was growing. Osborne recklessly compared the UK to Greece, said that a bankrupt UK had 'maxed out on it credit card' and then embarked on an eye-wateringly tight fiscal gamble all in the name of maintaining 'market confidence'.
These actions had the effect of trashing confidence in the broader economy and reducing aggregate demand at a time when consumption and investment was fragile. The fiscal gamble was especially short-sighted in the context of a tight squeeze on real incomes and a eurozone crisis which has crippled several of the UK's major export markets.
Even on the government's own terms (i.e. cutting the deficit), things are now seriously off track. The Prime Minister has had to admit that austerity could last until 2020, twice as long as the initial plan, and that there are more spending cuts to come.
In fact, with a shrinking economy, the government's deficit was again larger than expected in June, at £14.5 billion as against £13.9 billion a year ago, with borrowing so far in the fiscal year 2012 nearly 12% up on the same period last year.
The Chancellor's gamble simply isn't paying off, and what's needed is for Osborne to do what numerous other chancellors have done down the years and execute a speedy change of course so as to get the economy moving - think Lawson jettisoning money supply targeting or Lamont putting in place a new framework post-ERM (and singing in the bath). He famously didn't regret anything.
I've sketched out what a genuine 'Plan B' for growth could look like here in my columns at the Post (see here for example). It could look to ease the pace of cuts and temporarily reduce VAT.
Other elements should include: a genuine programme of 'credit easing' through the creation of new small business investment bank; a modestly funded national investment bank, with wider powers to leverage funding from the private sector to boost investment in infrastructure and green manufacturing; and a temporarily cut in national insurance contributions for the low paid and for younger workers. These could then be withdrawn, and signaled as such in advance, when economic growth gets moving and unemployment falls.
Remember, the government's target set out last year was to balance the cyclically adjusted current budget five years in the future. So neither a genuinely "timely, targeted and temporary" tax cut, or an increase in capital spending, would have any direct impact at all on the government's target anyway.
Yet the Chancellor's riposte in the face of dire GDP figures has been that he needs to "stay the course" and keep the ratings agencies happy. If he didn't, he argues, the agencies would downgrade the UK and would lead to higher long-term interest rates, in turn hurting the economy.
This argument simply doesn't stack up. The reality is that the UK has considerable fiscal manoeuvre and if we chose to use that space in a modest way the ratings agencies wouldn't blink and bond yields wouldn't rocket, as the IMF have usefully pointed out (see paragraph 43 on page 38 of their recent report on the UK here).
That IMF report should be interpreted as effectively giving Osborne cover for executing a change of tack given global circumstances if only he had the political nerve to do so.
I do agree with the Chancellor on one thing: he has said that he thinks that the UK economy has "deep seated problems". It does indeed. His own economic policy is one of them.
Professor David Bailey works at Coventry University Business School.
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David Bailey - Prof David Bailey, Coventry University Business School
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"The Bank of England had anyway predicted that Jubilee bank holidays would negatively impact on quarterly growth."
- codswallop. There was only ONE jubilee bank holiday, not plural, within the Quarter 2, Apr-Jun period. The regular late May, "Spring Bank Holiday"(formerly Whit Monday public holiday), was moved from May to June 4th.
The same excuse was trotted out by the BoE last year, anyway, blaming the day off for the splicing of one of the younger sponging parasites, and bad weather, and... .
Don't forget, the British public were told repeatedly by their mass media programmers before the June Jubilee that the celebration, far from being a drag on national output, would be a boon, dragging in x-zillionty spendthrift tourists, and encouraging Blighty to go on a huge spending binge, in unbounded joy at Brenda's not-deadness.
If we're gonna have a dry, economic exposition of what happened on the way to UK's miserable GDP figures try to at least cover the basic points of fact.
It's difficult to not agree with what P Kelly is saying, because he is right. And it is very difficult to agree with what Professor Bailey is saying, because he is so obviously wrong.
The UK was, and is continually fed the lie that spending of tax payers money is going to increase GDP and create thousands of jobs. We had that lie fed to us for the Jubilee, the Olympics and now it is being used to convince us that HS2 is a great idea.
Professor Bailey says that "The reality is that the UK has considerable fiscal manoeuvre and if we chose to use that space in a modest way the ratings agencies wouldn't blink and bond yields wouldn't rocket, as the IMF have usefully pointed out".
Is he sure about that? When he says "fiscal manoeuvre" does he actually mean borrow and spend? And what does he mean by modest? And since when did the IMF have any credibility left?
Professor Bailey also says "I do agree with the Chancellor on one thing: he has said that he thinks that the UK economy has "deep seated problems". It does indeed. His own economic policy is one of them"
I say the real problem is that we have a tiny minority in the UK, and especially so in Birmingham, whose sole role it is to acquire and recklessly spend tax payers money. The money spent does not get the results they say it will, and all that happens is that they enrich themselves personally.
I have said on these blogs that I respect Professor Bailey, as he does usually engage in debate. However, my respect falters when he is unable to answer direct questions, and when is unable to admit that his "ideas" are unworkable.
The headline used for this blog is a little cheeky. I and many others are not "Double Dip Deniers". I have infact openly said that we are heading for a "Treble Dip", with many years of problems ahead. However, if any Government implemented any of what Professor Bailey suggests, then you may as well turn the lights out in the UK, as it will be completely finished for decades to come. So I think the headline used is very unintelligent and sensationalist, and obviously playing to a political agenda. I thought Professor Bailey wanted to be taken seriously as a business expert?
UK Plc is BANKRUPT, and it's just a shame that Professor Bailey cannot accept this fact, but instead thinks he can spend, spend, spend.
Regards,
Mr Srutineer.
Srutinner, thanks as ever for taking the time to comment. I suggest you have a look at the IMF report I reference above and the link to it. It makes the point that the UK could ease the pace of deficit reduction without the credit reference agencies and/or the markets taking fright.
Professor Bailey, I did actually take the time to read large sections of the report before I made my initial post.
What the section you refer to actually says is,
"Further slowing consolidation would
likely entail the government reneging on its
net debt mandate. Would this trigger an
adverse market reaction? Such hypotheticals
are impossible to answer definitively, but there is little evidence that it would."
So it does not categorically say that the markets would not react in a negative way, but merely says there is little evidence from past situations to say they would. Also, we need to know quantitatively what "moderate" actually means. As it specifically mentions that as a caveat,
"they indicate that a moderate increase in the UK’s debt-to-GDP ratio may have small effects on UK sovereign risk".
Professor Bailey, the UK is in a very bad state economically, and I think we do agree on that. So we can no longer try a "hit and miss" approach using money we do not have. Sure, if you could guarantee that your suggestions would work then I would say go for it. However, there is no evidence I can see that suggests that your ideas would work. Much of your ideas lack detail and are flawed, and there is no "meat on the bone".
Regards,
Mr Srutineer.
Mr Scrutineer, even the IMF says there is "little evidence" to suggest that slowing the pace of fiscal contraction would frighten the markets. Perhaps you have a pre-set ideological view on this and really simply want to shrink the state. That's not the same as reducing the deficit though, as the Chancellor is now finding out.
Many of the economists who backed the chancellor when he embarked on this ill-fated strategy have realised that this is no longer appropriate.
You repeatedly asset the UK is 'bankrupt'. This is not the case, and talk by the chancellor along these lines when he came into government had the effect of badly damaging confidence.
A change of course is needed.
best wishes
DB
Professor Bailey,
Thanks for your response. My name is Mr Srutineer, and not Mr Scrutineer.
I do not have an ideological view to "shrink the state". However, I do want those responsible for the mess in both the public and private sectors to be out and unable to exert any further influence.
The UK is BANKRUPT. It has a budget deficit and has to borrow money to pay its bills.
Also, it is a fact that the "state" is supported wholly by the private sector tax payers. It is too large and largely unproductive, with numerous non-jobs which do not add any value to peoples daily lives, or the economy.
The public sector being too large and unsustainable is a view shared by Jon Moulton, a successful businessman who actually works in the real business World. And there are many others that share the same view. So I suppose Jon Moulton and the others are also following an ideological agenda? Get real.
So what about you and the never ending other economists and "business experts"? What real World do you "work" in and what ideological agenda are you following with your spend, spend, spend approach? It's always interesting that you are happy to spend tax payers money, but you never actually want to invest/risk your own personal money into any ventures? So why is that then?
And explain this one to me. You keep saying that businesses can't get the banks to lend to them? Well, take a walk up Dudley Road and ask the businesses there if they need or cannot get the banks to lend to them. Or take a walk along Soho Road. These businesses and communities have had vitually no money given to them by the Government, Birmingham City Council or the various tax payer funded Agencies. Yet they are flourishing. So use your expertise in business economics to explain that one.
The fact is that individuals like you keep the failed so called business leaders with their noses in the public sector trough. The current Government has "talked the talk" but failed to "walk the talk". They have incompetently allowed the real culprits of the mess the UK is in to simply move from one public sector job with their huge redundancy payments, and into another publicly funded job. So I'm no fan of the Chancellor.
As I've said before, I respect that you at least engage in debate with us "commoners", but that respect falters when you are unable to answer direct questions (like a politician) and you seletively read/refer to reports that you think agree with your ideas.
Have a think about it, and come back to me when you have a answer. However, I won't be holding my breath waiting for an answer as you never answer the question asked, do you?
Regards,
Mr Srutineer.
PS. The IMF report also says "impossible to answer definitively" in the same paragraph as it says the "little evidence" you choose to only read and quote.
Here is an article in the Mail which highlights what I have been saying for two years. It is a complete myth that the public sector has been cut and huge amounts of jobs have been shed. The public sector staff have just moved to "other" areas of the public sector. The whole process has been mismanaged by the Tories. Even worse, some public sector staff have collected huge redundancy payments and then simply "secured" another job which is also tax payer funded!
THE RESULT IS THAT THE PUBLIC SECTOR IS STILL TOO LARGE AND CANNOT BE SUSTAINED BY THE PRIVATE SECTOR!
And the opportunistic moronic Labour lot and their supporters, are trying to convince us that services are being cut because of the lack of public sector staff!
http://www.dailymail.co.uk/news/article-2191744/More-100-quangos-quashed-just-1-6-staff-sacked--Maude-claims-1-4billion-saved.html
Regards,
Mr Srutineer.
PS. Welcome to bankrupt UK PLC.
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