Posts Tagged ‘recession’

file4741270417603The UK can be thankful it has experts at the Bank of England, because its seems that they are all that stand between the UK economy and recession.

Ever since the result of the EU referendum was revealed, economic forecasters have been warning of the possibility, and in many cases the probability, of a UK recession later this year.

Indeed, before the referendum, Bank of England governor, Mark Carney, warned of precisely that danger. But then Mark Carney, along with the rest of the economic forecasters, is a so called expert, and as we all know in this post referendum era, they know nothing.

But maybe, we can ignore experts and instead look at the data.

The monthly purchasing managers’ indices, or PMIs, covering UK manufacturing, construction and services are a reasonably reliable guide to the state of the economy at any one time. They are not perfect, but then again nothing is, and when they pick-up, the UK economy seems to pick-up soon afterwards and when they fall, the UK economy usually dips soon afterwards.

The latest batch have been released in the last few days, and they were awful.

The good news is that of the three PMIs, the first to see the light of day, the PMI covering manufacturing, wasn’t too bad. The index rose to 52.1, a five month high.  It was good to see the index rise, but even so, by historical standards, it was a pretty lacklustre score.

Bear in mind, that when it comes to PMIs, the magic number is 50. Any score over is meant to suggest expansion, any score below is meant to suggest contraction.

And that takes me to the PMI tracking construction. In June, the index crashed, falling from 51.2 in May, which itself was seen as pretty woeful, to 46.0, that’s the lowest reading since December 2012.

Then, finally we got the PMI for services. The Business Activity Index which experts tell us is the index that matters – not that they know anything – fell from 53.5 in May to 52.3 In June, the lowest reading since December 2012.

Collectively, and based on past findings, the three PMIs point to growth of just 0.1 per cent in Q2. A recession is defined as two successive quarters of negative growth, so if the PMIs are accurate, then the UK only needs to slow very slightly from the June level and it’s in recession territory.

Most worrying of all, the three PMIs relate to a period before the EU referendum.   It seems likely that the UK economy has slowed more than slightly since then.

But not all are fretting.

Take Standard and Poor’s. It has taken time off from downgrading the UK’s credit rating, to suggest that the UK will avoid recession. It said that the fall in the pound will support exporters, that the UK chancellor, a certain George Osborne, will relax on his austerity drive, but most important of all, the Bank of England will cut interest rates and go for another burst of QE.

But the story of pound devaluations giving the UK economy a lift is mixed. Besides, sterling’s falls against the euro have been more modest.

George has already confirmed that he will go back on his pre-election promise to create a budget surplus by the end of the decade.

But it seems to me that the fate of the UK economy in the short term, and whether it can avoid recession, is dependent on the experts at the Bank of England. Let’s hope that really do know something after all.

Article originally posted on Fresh Business Thinking:  http://www.freshbusinessthinking.com/can-the-uk-avoid-a-brexit-recession/

file7181334521100

The numbers say what the numbers say. It may not feel right; it may defy reason, but there are reasons to think the Eurozone may be set to exit recession.

The latest flash Purchasing Managers’ Index tracking Eurozone manufacturing and services hit an 18 month high.

That is good, but especially encouraging was that the July index was 50.00, which is good news because 50 is seen as the key level. Anything below 50 is supposed to correspond with contraction; anything above signifies growth. Okay, a reading of 50 is not that remarkable, and this is just the flash reading, meaning that it is an early estimate. But it is a good sign, nonetheless.

Markit, which compiles the data, said: “Manufacturers reported the largest monthly increase in output since June 2011, registering an expansion for the first time since February of last year. Service sector activity meanwhile fell only marginally, recording the smallest decline in the current 18-month sequence and showing signs of stabilising after the marked rates of decline seen earlier in the year.”

In Germany output rose at the fastest rate for five months. Service sector growth hit a five-month high while manufacturers reported the steepest monthly increase in output since February of last year. Overall job creation hit the highest since March.
As for France, the PMI hit its highest level since March 2012. It’s not the only good news out of France of late. An index showing that morale in the industrial sector recently rose for the fourth month running, led the French Finance Minister Pierre Moscovici to say: “Nous sommes en sortie de recession,” or “We are out of recession.”

On the other hand, the index measuring French industrial morale is still below the historic average. The PMI was up, but at 48.8 still pointed to contraction, and in any case, France has to enforce much more substantive reforms to its labour market before it can claim its struggle is over.

Ben May, European economist at Capital Economics, said: “There are some signs that the euro-zone economy is on the mend and might perhaps soon exit recession. Nonetheless, the PMI and other business surveys have signalled several false dawns in the recent past. What’s more, with banks still reluctant to lend and demand for credit remaining weak, it is still too soon to conclude that the region is in recovery mode.

© Investment & Business News 2013

file0001179129151

Permanent! Do recessions and economic depressions cause permanent damage to the economy, or do we see a catch-up period in the years that follow? In some ways it is like asking whether going on holiday damages your total level of productivity. Do you work extra hard in the days before going away and then when you return, so that within a few weeks, as far as backlog of work is concerned, it is as if you never went away? Do holidays cause permanent damage to output?

The answer to that question is quite important because it may determine whether the UK will boom later this decade. One thing we can say is this. The Great Depression in the US during the 1930s was very nasty, but within a decade or so of it ending, US GDP was much greater than it would have been had growth followed the pre-depression trajectory.

Recessions caused by financial crises tend to be different. They tend to be more severe and it can take longer for recovery to occur. Various economists have had a go at calculating the permanent loss of GDP that occurs after a recession caused by a financial crisis. Estimates vary, but, according to Capital Economics, they are all – or nearly all – within the 2 to 10 per cent mark. That is to say once the dust has settled and things have returned to normal, total GDP is between 2 and 10 per cent less than what it would have been had the financial crisis never occurred.

Of course the causal link may be the other way round. It may be that GDP in the years leading up to a financial crisis is illusionary. It is not so much that such a crisis causes permanent loss; rather it is that total output was not real, not really real, and largely constructed from the economic equivalent of smoke and mirrors.
Right now

UK GDP is around 15 per cent short of what it would have been had things carried on, or as most forecasters had predicted before 2008. By the end of next year, the gap between actuality and what one might loosely call potential is likely to be around 16.5 per cent.

So let’s say that permanent damage caused to the economy lies somewhere halfway between the 2 and 10 per cent figures, and is 6 per cent. That means the UK will eventually claw back no less than 10.5 per cent of GDP lost during the downturn. Let’s say this happens between 2015 and 2020 – not an unreasonable assumption – and that underlying growth is 2.5 per cent. During this half a decade annual growth should average around 4 per cent a year. And funnily enough, this is precisely what Capital Economics expects to happen.

In the build-up to the financial crisis Capital Economics was definitely one of the more bearish of commentators, and made its name for forecasting something of a crash in UK house prices. Indeed, when it comes to forecasts of UK house prices it remains distinctly bearish. Yet, earlier this week it forecast what one can only really call a boom for the UK economy within two or three years.

It suggests the loss to the UK’s permanent output was limited by two key factors. Firstly, spending on R&D as a proportion of GDP has actually been higher since the recession began. Theoretically potential output continued to grow, even if actual output didn’t. It also suggested that because unemployment did not rise to the kind of levels seen in the past, there was less permanent damage. The rationale behind this is that people who have been unemployed for an extended period of time often lose hope, and become less productive in the future.

© Investment & Business News 2013

“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

In April wages, including bonuses, fell by 0.3 per cent. This was a staggeringly awful piece of economic data, but was it just a one-off?

This morning data for May was out, and it was much better, with average wages rising 3.3 per cent in the year to May. During the same period, inflation was 2.4 per cent, so for the first time in a very long while, average wages rose faster than prices, meaning that average workers were better off.

There are some buts, however.

Firstly, it appears that the figures were distorted by the end of the tax year. Bonus payments were delayed until after April to take advantage of lower income tax rate. So that at least partially explains why the data for April looked so awful, but so good for May.

The ONS prefers to look at a three month periods. And in the three months to April, average wages rose by 1.3 per cent compared to a year ago. That was better than April when they rose by 0.6 per cent, but still at the lower end of what we have seen over the last few years. In other words, once again, the average worker was worse off in the three months to May, after taking into account inflation compared to the same period in 2012.

Secondly, because the end of the tax year distorted bonus payments, maybe on this occasion we should consider wages before bonuses – or regular pay as the ONS calls it. In May regular pay rose by 1.3 per cent, but in the three months to May it rose by just 0.9 per cent, which was the second lowest increase in the last 12 months.

Inflation is expected to rise over the next few months, so there is little reason to believe wages will grow faster than inflation meaning that there will be no positive growth in real wagesfor many months.

This is the flip side to better data on the jobs front. At 1.51 million, the unemployment rate in the three months to January (the latest period for which we have data) was at a two year low.

But relatively low unemployment – that is to say low considering where the economy is at – is being paid for by low wage growth. So the economy is still in a downturn, unemployment is surprisingly high given this, but look to wages for a partial explanation. This is why some say we have a problem of zombie companies in the UK, maybe even a zombie workforce, keeping low paid jobs, with low levels of productivity growth.

© Investment & Business News 2013

The news out of the euro area was good yesterday. Yes, it is still in recession, but it has been in recession for a record length of time. No, there is no sign of the recession coming to an end, but at least the rate of contraction seems to be falling.

See it in terms of a football team that has been thrashed three games in a row, say seven nil, six nil and eight nil. Then it only gets beaten four nil, and the manager breathes a sigh of relief, fans go home smiling, things are getting better, they say.

The latest Purchasing Managers’ Index tracking the euro area was out yesterday. The index rose to a 15 month high.

In fact, it rose from 46.7 to 48.3. As Markit, which compiles the PMI data, said: “The seasonally adjusted Markit Eurozone manufacturing PMI indicated the slowest pace of contraction since February 2012.”

It is just that any score under 50 is meant to suggest contraction.

The PMIs for Germany, the Netherlands and Austria all hit three month highs; Italy rose to a four month high; France to a 13 month high; Greece to a 23 month high, and Spain to 24 month high.

That may seem impressive, but just bear in mind that in each case the PMI index was consistent with contraction.

Yes it is good news, and maybe it is a little harsh to compare it with a football team celebrating because it had only been beaten four nil, but neither does the data provide reason for much excitement.

PS: In Spain, there are signs of a gradual improvement – although unemployment remains awful. Talk is that the Spanish economy is beginning to have a more Germanic feel about it. Maybe in a few years’ time Spain, just like Germany, will be a great exporter… maybe. Just bear in mind that the global economy cannot afford too many Germanic type models, because if every country tries to export more than it imports the result will be economic depression.

© Investment & Business News 2013

It appears that the Chinese economy lurched backwards again in May. The Eurozone remained firmly in recession, or is that depression? So much for things looking up!

You may know that the Purchasing Managers’ Indices follow a formula, with any score over 50 meaning expansion; under 50 indicates contraction. However, with China it is not that simple, and normally a score under 50 suggests growth slowing rather than outright contraction.

This morning the flash composite PMI for China from HSBC/Markit and for the Eurozone from Markit were out.

These are preliminary readings, with the fuller and more accurate PMIs due out at the beginning of June.

The May flash composite PMI for China was 49.6, the first reading under 50 since last October. The May flash composite PMI for the Eurozone was 47.7, the highest reading in three months but still consistent with recession.

Let’s see what the more accurate and detailed PMIs for both China and the Eurozone say in ten days’, or so, time.

© 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

240

Just a hint, but good news may have been lurking in the latest report on UK manufacturing. More to the point, it was exports – the one area in which the UK really does need to see a better performance – that provided the promise. On the surface there was nothing out of the way in the latest Purchasing Managers’ Index – or PMI – for UK manufacturing.

The index rose from 48.6 in March to 49.8. Any score under 50 is mean to suggest contraction. So the index is still suggesting UK manufacturing is in recession.

Furthermore, much of the gain can be put down to clearing backlogs of work, caused partly by all that nasty weather we had in March hitting production. The good news, however, relates to the more forward looking indicators. The output balance jumped from 47.8 to 50.5. Again, a reading of 50.5 is no great shakes, but everything is relative – and relative to recent months that is a good showing.

The sub index measuring exports, however, rose above 50 for the first time in a year, and in fact hit its highest level since July 2011.

Apparently, the companies which were surveyed to form the index reported rises in sales to clients in North America, the Middle East, Latin America and Australia.

Just to reiterate, things are relative.

UK manufacturing is still barely expanding, and export growth is trivial. Some of the improvement may have been down to catching up with output lost during that cold March. Furthermore, last week the CBI industrial trend survey indicated a decrease in total new orders driven by a fall in domestic demand in the last quarter. It recorded the fastest pace of decline since January 2012.

On its own this report does not point to recovery, not even an export recovery, but if other surveys support these findings over the next few weeks, that may not be sufficiently good news to justify opening a bottle of Champagne, maybe not even good enough to open a bottle of Prosecco, but a very small glass of cheap fizz may be forgivable.

© Investment & Business News 2013

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