Posts Tagged ‘Recession shapes’

“The recovery is based on shaky foundations,” said Capital Economics in its analysis of the latest data on UK GDP. The good news, according to our beloved compiler of statistics otherwise known as the ONS, is that the UK never did have a double dip recession after all. The bad news? Well, there’s lots of that.

Do you remember Norman Lamont? Poor old Norm! He said he could see signs of green shoots. The media, with stats to back them up, had a jolly good laugh at the then chancellor’s expense. Subsequent data showed that Mr Lamont was right, but by then no one cared.

When data out last year revealed that the UK was back in recession, people cared a great deal. At one point, the ONS had the UK contracting by 0.4 per cent in Q4 2011 and by 0.3 per cent in Q1 2012. So that was two quarters of contraction; woe was up, the UK was in recession. The ONS had the UK contracting in Q2 2012 too, but that is a different story.

Since then the ONS has revised its data, and then revised it some more, and in its latest revision of revision of revision it is now saying that the UK was in fact flat – that is to say growth was zero per cent between Q4 2011 and Q1 2012. So there was no double dip. It also decided that the recession of 2008/09 was worse than it previously estimated, with the UK contracting by 7.2 per cent instead of by 6.3 per cent as it previously estimated.

The news on the latest quarter was okay, but not so good when you drill down. It also has current GDP 3.9 per cent below the pre finance crisis peak, whereas it previously had GDP 2.6 per cent less than peak.

The ONS still reckons the UK expanded by 0.3 per cent in Q1 this year, however. But it recorded a 1.9 per cent drop in business investment, despite a 4.9 per cent rise in company profits. In other words, companies are not investing their profits. Household incomes were 1.7 per cent less in Q1 than in Q4 2012, which does rather beg the question: if incomes were less and investment down, how did growth occur? The answer lies in savings – or rather lack of them. The ONS reckons households’ saving ratio has fallen from 5.9 per cent in Q4 2012, to 4.2 per cent in Q1 2013. So can that last, and indeed do we want it to?

The UK economy needs its households to spend more and save less. But common sense dictates that households need to save more. The answer lies in households saving more, and the money saved being used to fund investment. But as the fall in business investment shows, this has not happened.

Here is an idea: why doesn’t the government borrow from these savings, and invest the money? Well, if it did it would become a Keynesian government, and we wouldn’t want that, would we?

© Investment & Business News 2013

247

Actually, it doesn’t matter. It really doesn’t, not in the scheme of things. Did the UK have a double dip recession or not, who cares? What we know is that the UK economy has performed poorly. To focus on whether we had a double dip is to focus on sound bites over reason.

But…just to set the record straight, here is the story so far, told briefly – because it is not that important – but hopefully accurately, because it is perceived as important and myths are circulating about this issue.

In January 2012, the ONS released its first estimate of GDP for Q1 2011. It estimated a contraction of 0.2 per cent. Its first estimate of GDP for Q1 2012 was for the economy to have also contracted by 0.2 per cent. As for Q2, it first estimated a contraction of 0.5 per cent.

So remember that, based on first estimates, the UK saw growth of minus 0.2, minus 0.2 and minus 0.5 per cent in Q4 2011, Q1 2012 and Q2 2012.

There then followed a period of revisions. By August of last year, ONS data was telling an even more alarming story with minus 0.4, minus 0.3 and minus 0.5 per cent growth.

Now look at the latest data, out a few days ago, and the story is as follows: minus 0.1 per cent, minus 0.1 per cent and minus 0.4 per cent.

In short, things don’t look anywhere near as bad.

The ONS itself tried to put the record straight: “The falls in output from 2011 Q4 to 2012 Q2 are all modest, “ it stated, adding: “In total the economy contracted by 0.5 per cent. The decline in output in the first two of these quarters is particularly small. When growth is very weak, the difference between, say, estimated growth of 0.1 per cent and -0.1 per cent in a quarter is actually within the statistical margin of error.

The contraction in the economy in the following quarter, the April-June period of 2012, is explained by the additional bank holiday which was called in June as part of the Queen’s diamond jubilee celebrations. The impact of such special factors should not perhaps contribute towards a recession.”

The National Institute of Economic and Social Research (NIESR) looked at much the same issue. Simon Kirby from NIESR in a report published today said: “Much of the attention focused on the avoidance of a ‘triple-dip’, rather than another quarter of relatively weak economic growth. Revisions to data mean that it is increasingly unclear whether there was even a ‘double-dip’.

As we have noted many times before, obsessing about a couple of quarters of minute falls in output distracts us from the clear trend: that of a stagnating economy.”

To ask whether the UK had a double or treble dip is, in fact, to ask the wrong thing. What we can say is that the UK’s output is some 2.5 per cent below the peak recorded in early 2008. It is the longest downturn ever recorded, and that is surely what matters.

© Investment & Business News 2013