I wrote the first 1/2-2/3 of this story over the weekend,hence the reason for the somewhat backwards presentation of material. The GDP graphs do not include the latest information. However, it goes without saying (so I'll go ahead and say it), yet another country is learning a lesson the hard way.
From the April 4-5 meeting minutes of the Bank of England:
According to the third ONS estimate, GDP had fallen by 0.3% in the fourth quarter of 2011, 0.1 percentage points weaker than reported in the second release. The ONS had also revised down the path for household consumption during 2011 such that the level at the end of the year was 0.5% lower than previously estimated. Together with an upward revision to households’ income, this implied a sizable revision upwards to the estimated household saving rate. This now appeared to have fallen back only modestly since its peak in 2009.
The top chart shows total GDP, which is still below pre-recession levels. Also note there were two years of decline (2009 and 2010) with a slight increase in 2011. The second chart shows the quarter to quarter growth, which shows that in three of the last give quarters UK GDP has shrunk.
The good news in the above statement is the increased savings rate which means two things going forward:
1.) Consumers have increased spending power if they choose to use it, and
2.) The deposit base is increasing, which increases bank reserves. This can lead to an increase in overall credit, assuming there is an increase in demand.
In line with the usual pre-release arrangements, the Governor informed the Committee that manufacturing output had fallen by 1% in February and that output in January had been revised down. This was somewhat at odds with the more positive message from the corresponding business surveys. The data on service sector output in January were consistent with solid growth in services in the first quarter of 2012. The CIPS/Markit indices for manufacturing, services and construction had all risen in March and the composite expectations balance had reached its highest level in over a year. The BCC Quarterly Economic Survey had recorded rising sales balances for both manufacturing and services in the first quarter. And the Bank’s Agents had reported a broad-based, if still modest, pickup in output growth over the previous three months. Consistent with these reports, household and corporate broad money growth had increased in January and February on a three-month annualised basis.
For the second month in a row, the ONS had reported a particularly large contraction in construction output, which it estimated to have fallen by around 12% in each of December and January on a non-seasonally adjusted basis. Even if activity were to rise strongly in February and March, measured construction output was likely to show a very sharp fall in the first quarter as a whole. This was at odds with other indicators of construction activity from CIPS/Markit, Experian and the Bank’s Agents, which had generally pointed to much smaller declines around the turn of the year. Although construction orders had been weak, the Construction Products Association was expecting only a modest reduction in output during the year as a whole.Here are the relevant data points from Markit:
Only time will tell who is right. However, an increase in construction spending would be most welcome as this has an ancillary economic effect down the line.
In the absence of revisions to the latest vintage of data, the contraction in measured construction output was likely to depress measured GDP growth significantly in the first quarter. Indeed, it was possible that the ONS’s preliminary estimate for GDP could record a fall in aggregate output. In the second quarter, some activity was likely to be lost because of the extra bank holiday associated with the Queen’s Diamond Jubilee celebrations. With output having already contracted in the fourth quarter of last year, the Committee could not rule out the publication of official data showing GDP falling for three successive quarters. Nevertheless, the Committee’s judgement was that, abstracting from both the puzzling weakness in measured construction output and the impact of one-off factors, the economy appeared likely to be expanding, albeit only modestly, in the first half of the yearAnd now, just to add the icing on the cake, we learn that the UK is in a technical recession (from the office of national statistics)
As explained by Reuters:
- The chained volume measure of GDP decreased by 0.2 per cent in Q1 2012
- Output of the production industries decreased by 0.4 per cent in Q1 2012, following a decrease of 1.3 per cent in the previous quarter
- Construction sector output decreased by 3.0 per cent in Q1 2012, following a decrease of 0.2 per cent in the previous quarter
- Output of the service industries increased by 0.1 per cent in Q1 2012, following a decrease of 0.1 per cent in the previous quarter
- GDP in volume terms is flat in Q1 2012, when compared with Q1 2011
Britain's economy has fallen into its second recession since the financial crisis after an shock contraction at the start of 2012, heaping pressure on Prime Minister David Cameron's government as it reels from a series of political missteps.For a good summation of the report and what this means, here is a link to the FT Money Supply Blog
Britain's Conservative-Liberal Democrat coalition has seen its support crumble after weeks of criticism over unpopular tax measures in last month's budget, and is under further pressure from revelations about its close links with media tycoon Rupert Murdoch.
With local elections taking place on May 3, there could hardly be worse timing for Wednesday's news from the Office for National Statistics that Britain's gross domestic product fell 0.2 percent in the first quarter of 2012 on top of a 0.3 percent decline at the end of 2011.
Most economists had expected Britain's economy to eke out modest growth in early 2012, but these forecasts were upset by the biggest fall in construction output in three years, coupled with a slump in financial services and oil and gas extraction.
10 comments:
So tax and spend is the answer? I don't think so.
I predict that the day we quit running deficits of >$1 trillion per year, we too will be in a recession.
Ideally, nations should increase tax rates to slow economic growth (and increase reserves) during prosperous times, and increase spending and avoid tax increases during hard times. Problem is, when growth is good, revenues are good, so increased tax rates are viewed as unnecessary.
Hale, I notice that Chris Giles at FT doesn't agree with your assessment that Austerity is a failure. Perhaps by 3Q2013 after more austerity policies have been introduced he might be swayed.
I hope we enjoy moderate growth through 2Q2013, but after that we'll have to wait and see.
"So tax and spend is the answer? I don't think so."
Not just tax and spend; but tax the rich and corporations, and redistribute money to the poor and middle-class through government spending on jobs on infrastructure. That's how FDR fixed the Great Depression after it was caused by twelve years of failed right-wing policies.
Income and wealth inequality is cancerous, and it was the chief cause of the Great Depression. In the absence of government intervention, the "free market" that you worship actually has the effect of redistributing more and more money into the hands of the 1% at the expense of everyone else.
"It is needless to repeat the details of the program which this Administration has been hammering out on the anvils of experience. No amount of misrepresentation or statistical contortion can conceal or blur or smear that record. [...]
For twelve years this Nation was afflicted with hear-nothing, see-nothing, do-nothing Government. The Nation looked to Government but the Government looked away. Nine mocking years with the golden calf and three long years of the scourge! Nine crazy years at the ticker and three long years in the breadlines! Nine mad years of mirage and three long years of despair! Powerful influences strive today to restore that kind of government with its doctrine that that Government is best which is most indifferent.
For nearly four years you have had an Administration which instead of twirling its thumbs has rolled up its sleeves. We will keep our sleeves rolled up. We had to struggle with the old enemies of peace: business and financial monopoly, speculation, reckless banking, class antagonism, sectionalism, war profiteering.
They had begun to consider the Government of the United States as a mere appendage to their own affairs. We know now that Government by organized money is just as dangerous as Government by organized mob.
Never before in all our history have these forces been so united against one candidate as they stand today. They are unanimous in their hate for me, and I welcome their hatred." -- President Franklin D. Roosevelt, October 31, 1936.
Intellectually written article indeed. Thanks a lot for sharing.
Liz, to paraphrase George Santayana's famous comment: those who cannot understand the past (or attempt to revise it) are condemned to repeat it. You say, 'FDR fixed the Great Depression after it was caused by twelve years of failed right-wing policies.' Are you serious? Fixed it? After his little 1936 rant you quote, we had the SECOND depression in 1938. But, you folks forget that little tidbit. And his policies in the earlier 1930s EXTENDED the Depression, instead of fixing it. So, nice try. But, learn your history.
Anon
As for learning your history, perhaps you should as well before commenting.
1.) By 1937, real GDP had returned to 1929 levels. The SAAR rates of GDP growth for 1933-36 were around 10%, while it was a little over 5% for 1937.
2.) In 1937, Congress went on an ... austerity kick, which led to the slowdown.
3.) The studies which you cite supposedly claiming that FDR extended the Depression are based on Chicago economic analysis, which has two fatal flaws. First, it assumes that all actors in an economy are rational. Second, it assumes that prices are not sticky. Put another was, the model is flawed and completely disproved by day-to-day evidence.
Might I suggest you return to Free Republic, where thought and data are frowned upon? You'd obviously fit right in.
The reason I didn't initially provide stats was brevity, combined with the fact that Bonddad and NDD have more comprehensive stats from the New Deal era than I do. But since I've been challenged on it, here's a link with some relevant statistics from 1929-1945:
http://www.huppi.com/kangaroo/Timeline.htm
Scroll down to the bottom for the table.
It's just as FDR said in his speech. The failed right-wing policies of Harding, Coolidge and Hoover from 1921-32 caused and then prolonged the Great Depression. The unemployment rate increased massively under Hoover's right-wing austerity policies, and only began to improve once FDR took office and implemented the New Deal.
The relapse into recession during 1937-8 was caused by austerity, and then turned around by further domestic spending. It's true that the Great Depression was only partially cured by the New Deal, and that it wasn't until WW2 that FDR had an excuse to spend massively enough to fix the economy decisively. However, (a) WW2 spending WAS a form of Keynesian stimulus spending; and (b) a larger amount of domestic spending could have fixed the problem earlier.
FDR decreased the unemployment rate from 24.9% to 14.3% in four years using domestic spending. (And those figures don't even include government employment, if I'm not mistaken. They're the figures preferred by conservatives who oppose the New Deal.)
Today, stimulus spending on jobs, infrastructure and clean energy would be just as effective as the WW2 military spending in fixing unemployment. It's a crying shame that ignorance and lack of political will, along with the Senate filibuster in 2009-10, have impeded this from being implemented to a sufficient degree. Nonetheless, the February 2009 stimulus package was successful in saving jobs and preventing the unemployment rate from reaching 12-13% or worse.
Post a Comment