Posts Tagged ‘recession’

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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

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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

Think of it in terms of mountain climbing. A recession is like falling down the mountain. A downturn relates to that period of time following the fall, in which you are trying to climb back up.

We didn’t know it at the time, but in early 2008 the UK was at the top of a mountain. As recession bit, it fell from the summit. And then it stayed down. As other countries, most noticeably the US and Germany, climbed back up and started gaining fresh altitude, the UK stumbled along in the valley.

Then at the end of last year, the UK did something rather disturbing. It fell from the valley into another even deeper valley. It entered recession, whilst still in a downturn.

According to data from the Office of National Statistics out this morning, the UK climbed out of the deeper valley in Q3.

This then is the story of the last 12 months. In Q4 2011 UK GDP contracted by 0.4 per cent. In Q1 2012 it contracted by 0.3 per cent. In Q2 it contracted by 0.4 per cent. In Q3 it grew by 1.0 per cent.

It means that UK output is now just 0.1 per cent below the Q3 2011 level. In other words, it has climbed out of the deep valley, and is within reach of the slightly higher valley.

The summit it occupied just under five years ago still towers above, however.

It’s the longest downturn on record. And right now the UK’s output is still almost 4 per cent below its peak.

But is it the beginning of the recovery? Does economic Shangri-la await us in the valley of prosperity over the mountain?

The question mark partly relates to the effect of one-offs.  Q2 saw a slump because of lost production caused by the jubilee weekend. Q3 made up for that lost ground. Then there was the Olympic games.

Vicky Redwood, Chief UK Economist at Capital Economics, reckons that of the 1 per cent jump, around 0.7 percentage points was down to one-offs.

She said: “And as the Olympic effects unwind, it is still possible that the economy contracts again in Q4. This would leave GDP in 2012 as a whole shrinking.”

Markit’s Mark Williamson said: “There is a real risk that a return to contraction might be seen again in the fourth quarter. The business surveys have signalled a slowing in the pace of growth to near stagnation in September, and consumer surveys have meanwhile shown households to have grown more pessimistic about their financial outlook in October. It also seems unlikely that exports will act as a spur to growth, with recent PMI surveys showing ongoing malaise in key export markets such as the US, China and in particular the Eurozone. There is also increasing evidence that companies are focusing on cost-cutting in the light of the gloomier outlook, trimming headcounts, cutting investment and reducing other non-discretionary costs such as advertising and marketing.”

Still, be grateful for small mercies and Q3’s data was at least that. As for David Cameron letting it slip in parliament that good news was on its way, maybe he was just suffering from altitude sickness.

©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

It was told here a couple of weeks ago how there were signs of green shoots. For example, industrial production in July saw its biggest month on month rise in 25 years. No less than 236,000 more people gained employment in the three months to the end of July.

That’s all very encouraging, but…

Last week saw the latest Purchasing Managers’ Indices (PMIs) from Markit/CIPS, and to put it mildly they weren’t very good.

In a nut shell, the PMI covering UK manufacturing fell from a score of 48.7 in August, which was poor, to 47.6 in September.  Bear in mind, any score under 50 is meant to denote contraction. The PMI for construction improved, but only mildly and from a low level. It rose from 49 to 49.5. As for services, the Business Activity Index fell from 53.7 to 52.2. Put them all together, allow for the importance of each of the three sectors to the UK economy and you get a composite reading of 51.1 from 52.2 in August. Markit reckons these indices suggest quarterly growth of 0.1 per cent.

Okay, that’s not much growth, but at least it is growth. Does that not mean the three reports combined suggest the UK is slowly pulling out of recession? Well maybe. But just bear in mind, that earlier this year when official stats proclaimed that the UK was in recession, cynics pointed to other data which painted a slightly more positive image of the economy.

Put it this way, when the Office of National Statistics said the UK was in recession, the PMIs suggested mild growth. Now the PMIs have deteriorated.

Sorry to leave this on such a downbeat note, but the PMIs indices covering employment painted an even worse picture. The PMI employment index fell to 48.1 – that’s a ten month low and consistent with unemployment rising.

©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