Posts Tagged ‘national institute of economics and social research’

Let’s define a downturn as the period of time that GDP has been below peak. GDP peaked in early 2008, but here we are in 2013 and still the UK economy is smaller than it was some five years ago; in fact it is about four per cent smaller.

It is not like that everywhere and it was not like that before.

Germany may be re-entering recession, but at least it has the comfort of knowing that the pre-recession level of GDP was at an all-time high

US economic growth may be anaemic, but at least Uncle Sam knows that every month GDP moves into new territory.

Alas in the UK, we are running along a valley, and it remains a long way to the top.

According to the National Institute of Economic and Social Research:

In the early 1920s the UK’s recession was severe to begin with, but within four years the downturn was over.

In the early 1930s the recession wasn’t quite as bad as the previous one, but the recovery was slower. But within two years, things looked better, and within four the downturn was over.

The recessions of the 1970s and 1990s were much milder. The recession of the late 1970s early 1980s was nasty, not as bad as the pre-war recessions, but, once again, within four years it was over.

This time we are almost 60 months in.

This chart looks pretty, because it has lots of nice colours. Its inference is not so attractive, however.

NIESR

©2012 Investment and Business News.

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Do you trust the weather forecast? If you are really sad, like perhaps someone not a million miles away from the computer this article is being written on, you may start checking the weather forecast on your iPhone with such regularity that you are in danger of believing what the iPhone says over what the view out of your window says.

JR Ewing once said to his wife, after she found him in bed with a young lady: “Sue Ellen are you going to believe me, or your lying eyes?” It’s a bit like that with that conflict between the weather and what the iPhone says. Your eyes say it’s raining. The pitter patter on your umbrella says it’s raining, but your iPhone says it’s not. So who do you believe: your iPhone or your lying eyes, ears and skin?

Economic data is a bit like that. The surveys say we are in recession, again, or pretty close. The official data is more optimistic. Who do you believe?

Take the Purchasing Managers’ Indices from Markit/CIPS. At the beginning of this year, they suggested the UK was expanding – albeit modestly. The official data said we were in recession. Which was one is right? Only time will tell, but it’s an irony that for all the talk about the danger of a triple dip recession it is possible we haven’t even suffered from a double dip.

But this is the worry. Of late the PMIs have been bad. The latest set pointed to contraction. So here is your question:  if the UK was officially in recession when the normally reliable PMIs said it wasn’t, what is the UK doing when the PMIs say we may be in recession?

If this was a soap, you could imagine the music cutting in it at this point, as we learn that we have to wait until next week for the next thrilling instalment.

It is just that National Institute of Economic and Social Research (NIESR) tells a story that probably pretty much says it all. See this graph.

Quite simply there hasn’t been a downturn like this one, not since before the 1930s, anyway.

And to really rub salt into the wound, some data out this week just added to the sense of woe. UK industrial output has fallen for three months on the trot, and manufacturing contracted by 2.1 per cent in the year to October. Of course that’s just data, but then since this is pretty much in line with what the amore anecdotal evidence from Markit is saying, we probably have to accept it is about right.

You can’t fight a crisis caused by too much debt by building up debt. That’s the classic reproach given to any who dare say we need a government backed stimulus.

Well that may be right, but consider this chart, which looks at the US fiscal deficit and compares it with what it would have been like if things had carried on as they were prior to 2008. This was taken from this piece at Real World Economics, click here for a fuller explanation:  Krugman uses misleading deficit graph 

The point is that it shows pretty clearly that if there had been no crisis in 2008, and the US had carried on growing at the rate we had become used to, US annual borrowing would be much much lower than it is.

In most cases government borrowing did not cause today’s woes, rather today’s woes caused government borrowing. And by the way nowhere is this more true than in Spain, which had much lower government debt before the recession than any other large developed economy in the world.

Then there’s the TUC. It has produced a report which shows that over the last 30 years the share of GDP taken up by wages has fallen from 59 to 53 per cent, while corporate profits’ share has risen from 25 to 29 per cent. You might ask: so what? It is just that for an economy to grow it needs demand to grow, and for demand to grow wages must rise. Over the last 30 years this has not been happening to a sufficient extent to create sustainable growth. Furthermore, while corporate profits have risen, investment has not risen in tandem. Instead, rising corporate profits helped to lead to more savings sloshing around the system, pushing down interest rates, and pushing up asset prices such as house prices.

It is true that the noughties boom was built on credit. But the credit seemed reasonable because it was backed by rising house prices. The fact that GDP was not trickling down into wages did not mean lower growth, as instead it was trickling down into consumer borrowing.

The TUC blames the City. It says that the City has crowded out the rest of UK industry. Well to the extent that success in the City led to a higher pound, making it harder for manufacturers to compete, it may have a point.

But surely the real reason why profit growth has been outstripping growth in wages is down to technology. Economists are so busy denying that technology is creating growth, that they are missing the real story. Technology is creating fantastic potential for wealth creation, but right now it is also leading to the widening gap between the reward to capital and the reward to labour.

With 3D printing just a few years away from becoming a mass market product, and with nano technology perhaps a decade or so behind, it is hard to believe that the trend of the last 30 years is going to reverse.

Anyway, talking of house prices, is that a hint that they may be rising next year? Click here to find out more

©2012 Investment and Business News.

Investment and Business News is a succinct, sometimes amusing often thought provoking and always informative email newsletter. Our readers say they look forward to receiving it, and so will you. Sign-up here

Look, you have to be patient. It takes time to repay debt, but once it is repaid, well…yippee. That is one argument.

Others go further, and say things such as: “If it isn’t hurting, it isn’t working.”

Those who support austerity don’t deny it will be painful – except that is for a few nutters in the US Tea Party that seem to think there is an automatic and immediate positive relationship between austerity and growth.  No, the sane austerians are simply saying that it is worth it in the long run: pain today, wealth tomorrow.

And, of course, for most individuals such an attitude is right. Some businesses may argue that the way to deal with debt is to expand, but on the whole, most agree that times of peril mean cuts.

The snag is that when we are talking about the whole economy, things can get very nasty if we all start behaving in the same way. If all those with debts make cutbacks, and as a result there is less demand, and those with savings see the fall in demand, so start saving even more, then the economy will start contracting faster. And supposing that as a result of these cuts, demand shrinks, our income falls, and as a result our debts actually increase. In such circumstances, the more we cut back, the worse our debts.

The National Institute of Economic and Social Research (NIESR) reckons this is precisely what’s happening.

In a report published this morning it said: “As a result of the fiscal consolidation plans currently in train, debt ratios will be higher in 2013 in the EU as a whole rather than lower.”

Its argument continued: “under normal circumstances a tightening in fiscal policy would also lead to a relaxation in monetary policy. However, with interest rates already at exceptionally low levels, this is unlikely or unfeasible.” To put it another way, when interest rates are near zero, the argument that you need to make cuts so that the central bank can then make interest rate cuts doesn’t hold up. Right now, we are in what’s called a liquidity trap. Rates can’t fall much further, but when the economy is struggling like it is, the normal solution is to cut interest rates. Quantitative easing is not proving very effective because people don’t want to borrow more. The Bank of England hopes, by the way, that QE will push up the price of government bonds, meaning other assets will look cheap in comparison and push their prices up, which will make us feel richer, so that we will spend more.

Returning to the NIESR report it stated: “During a downturn, when unemployment is high and job security low, a greater percentage of households and firms are likely to find themselves liquidity constrained.”

NIESR added – and this is the key bit – “With all countries consolidating simultaneously, output in each country is reduced not just by fiscal consolidation domestically, but by that in other countries, because of trade. In the EU, such spill-over effects are likely to be large.”

Now it is only right to point out at this stage that the NIESR director, Jonathon Portes, is very much a supporter of the idea of stimulus. He bats for the same side as Paul Krugman – an out an out supporter of Keynesianism. So given this, perhaps the conclusions of the NIESR report are not surprising.

But then again  austerity can work when applied by individual countries which can simultaneously grow via exports. But when austerity becomes a global thing, it becomes very dangerous.

On the other hand…

The big snag with fiscal stimulus is that sometimes economies need to adjust. There is a danger that a fiscal stimulus can take away the need for change.

Take Japan, as an example. In Japan failure is not popular. In fact, it is seen as something that needs to be avoided at all costs. But as a result, maybe Japan is too slow to change. This morning both Sharp and Panasonic warned of heavy losses in their current financial year.  Truth is, Japanese electronics companies are getting a drubbing.  Being thrashed by Apple, and Samsung and Google and Amazon is bad enough, but now even Microsoft with its Surface tablet is making the once seemingly invincible Japanese giants look like dinosaurs.

Maybe Keynesian is partly to blame. There’s not enough creative destruction in Japan.

So returning to the NIESR, it is right. Austerity is causing damage, and may even be making debt worse, but that does not mean we don’t need creative destruction.

The debate has become polarised. Either you are an Austerian or a Keynesian. Why can’t you be both?

Anyway to finish on a more cheerful note, here is piece by yours truly on some promising news out of China today.

©2012 Investment and Business News.

Investment and Business News is a succinct, sometimes amusing often thought provoking and always informative email newsletter. Our readers say they look forward to receiving it, and so will you. Sign-up here

In the garden the weeds and the green shoots seem pretty evenly spaced.

Here is one green shoot. UK industrial production rose by the highest level in 25 years in July. Here is the weed: in August it fell back, and despite the previous month’s rise, year on year industrial production in August was 1.1 per cent below the level from the year before. So far then, the weeds seem to be strangling all those budding flowers.

The Centre of Economics and Business Research (CEBR) predicted that next year inflation will fall below the rate of increase in average wages, leading to us all feeling better off, and so the economy should expand. In a similar vein, the latest report from the Ernst and Young Item Club has forecast falling inflation and rising house prices. Here is its chief economist Peter Spencer: “Inflation is coming back to heel, private sector employment is holding up, and the housing market also looks poised for a revival.” The Item Club reckons the economy will contract 0.2 per cent this year, grow by 1.2 per cent in 2013, and by 2014 in 2014. Yet, this leaves one question.  Why is it that ever since the UK fell into recession in 2008, economists have been predicting that the year after next will be better, and growth will be back to normal?

The National Institute of Economics and Social Research (NIESR) has been spotting weeds and green shoots. Last week it said that, according to its calculations, the UK expanded by 0.8 per cent in the three months to September. “The most robust rate of growth since the three months to July 2010,” it said.

But then it added: “Stripping out the effects of special events (the reversal of the negative effect from the additional bank holiday in June 2011 and the allocation of Olympics ticket sales from last year) suggest underlying growth is closer to 0.2 to 0.3 per cent per quarter.”

But back to greenery, the employment stats are good; 236,000 new jobs were created in the three months to July. Later this week we will see the data for the three months to August, but will this confirm green shoots, or point to weeds? Cynics say that in any case, much of the recent rise was down to a jump in the number of part-time workers.

And finally, there are the PMIs, or purchasing managers’ indices, as they are also called. The latest composite figures, combining manufacturing, construction and services fell in September to a level consistent with growth of just 0.1 per cent.

What is worrying, however, is that earlier this year the PMIs suggested mild growth, but the official data said recession. Since then the PMIs have got worse.

The PMI tracking employment fell to a ten month low in September.

Strictly speaking, of course, weeds grow from green shoots. But the fact is, right now evidence of a recovery seems to be based on optimistic projections rather than hard data.

©2012 Investment and Business News.

Investment and Business News is a succinct, sometimes amusing often thought provoking and always informative email newsletter. Our readers say they look forward to receiving it, and so will you. Sign-up here