jka on economics UK

UK GDP down by 5.6% in the second quarter, bad but past the worst?

Gross Domestic Product fell by 5.6% in the second quarter after 4.9% in the first quarter of the year. NIESR figures had suggested a deterioration in performance into the second half but the initial estimate of 5.2% fall was a little optimistic.

On a quarter by quarter basis, the fall was 0.8% following a fall of 2.4% in the previous quarter. Compared to the prior two recessions, it is now clear the recession is far worse than the modest downturn of 1990 and is even surpassing the severe recession on the 1980’s.

By sector, construction output is down by almost 15% year on year, manufacturing is down by almost 13%, utilities are down by 10% and in the service sector, hotels, distribution, transport and storage are down by 7%. Production overall was down 12% and the service sector fell by 3.8%. Government spending was assumed to be flat in the three month period.

The figures for the second quarter are worse than expected. According to the  Times, Hetal Mehta, the senior economic advisor to the Ernst & Young ITEM Club, said: "recent hopes of recovery have run ahead of reality. With credit still severely restricted, consumers and businesses continuing to retrench and world trade yet to pick up, it is hard to see any grounds for sustained optimism."

For the year as a whole, estimates of the fall in GDP have been increased to a decline of 4.5% following revisions from the ITEM Club (4.5%) and NIESR (4.3%). Slow growth of 0.7% is estimated for 2010. This is bad, very bad but hopefully we are past the worst. Next quarter figures are critical.

ONS : Gross Domestic Product Preliminary Estimate 2nd Quarter 2009.

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UK Retail Sales in June up almost 3%, sunshine, barbecues and discounts

Retail sales in June were up by 2.8% in volume terms compared to prior year and up by just 2.5% in value according to the latest data from the Office for National Statistics. The British Retail Consortium (BRC) claimed the latest data confirmed the BRC's results for June, suggesting sunshine, barbecues and clearance sales boosted June's spending.

BRC retail sales had increased by 1.4% on a like for like basis. Food sales were helped by the hot sunny weather as the UK dusted off the barbecues. Clearance sales boosted clothing, footwear and outdoor leisure but big-ticket homewares and furniture sales remained difficult. Non-store sales (internet, mail-order and phone sales) in June were 16.8% higher than a year ago.

The ONS data confirms the pattern. Non store sales were up by 10% in volume, but household related items were down by 5%. Clothing and footwear sales were up by 11% in volume but only 4% in volume reflecting widespread discounting. Food sales were up by 2.5% (volume) and 6.5% in value. Barbecue burgers and kebabs not cheap presumably.

Stephen Robertson, BRC Director General, said: "The official data confirm our findings that June's retail sales were boosted by sunshine, promotions and discounts. But the wholesale turnaround in consumer confidence retailers are looking for remains elusive. “Lower mortgage costs and energy prices are leaving a lot of people better off than a year ago. But many still favour saving over spending."

ONS Retail Sales June 2009.
British Retail Consortium

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Keynes, fruit machines and the US recovery package, implications for the UK

Keynes led us to believe the economy is like a fruit machine. Input the stimulus, pull the lever, the wheels spin and the jackpot of growth, falling unemployment and stable prices can be achieved.

Furthermore, models of the economy and the econometrics within are now so sophisticated, given a set target for growth and jobs, the required stimulus can easily be estimated. According to the Christine Romer, Chair of the Council of Economic advisors in the Obama administration, the arithmetic of recovery is pretty straight forward, or so we were led to believe.

Romer along with Jared Bernstein was tasked with authoring the administration’s package to recover from the recession of 2008/9. It was a big package around $775 billion approximately 5% of GDP over two years. But no need to worry, Romer and Bernstein outlined how the plan would lead to an increase in GDP of 3.7% and an increase in jobs of 3.7 million. They even published the chart of how unemployment rates would out turn, with or without the stimulus.

The model was based on three critical numbers, firstly the size of the stimulus, secondly, the extent to which the stimulus impacts on GDP growth, finally the extent to which the GDP growth leads to a reduction in unemployment. The key numbers are the multiplier and the Okun co-efficient. The mechanics of the fruit machine. Who said economic modelling was difficult.

Romer and Bernstein use the Keynesian multipliers of 1.5 for government spending and less than 1 for tax cuts. Spending leads to growth, growth increases jobs. “The rule of thumb is that a 1 percent increase in GDP corresponds to an increase in employment of approximately 1 million jobs, or about three-quarters of a percent".  An Okun co-efficient of 1.33. Keynesian multipliers and Okun co-efficients, it all seemed so easy

Unfortunately, the pattern of unemployment is moving off the map. The reality in the US  is far worse than expected, with or without the stimulus. The tax cuts have led to an increase in the savings ratio as household worry about jobs, repair balance sheets and reduce debts. Government spending programmes, the “shovel ready” plans, take time to be effective. Keynes taught that savings equals investment but investment is falling, savings are rising, rates have been falling. What news of the IS-LM model. Who said economic modelling was difficult, it is.

In the US the call is already for a second stimulus package but others caution on debt levels and the delayed impact of the initial spin off the wheels. In the UK, the government has no other option but to wait and see. There are no tokens left in the Treasury for the slot machine.

Romer and Bernstein: The Job impact of the American Recovery and Reinvestment Plan.

January Could the American recovery plan work in the UK

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Government borrowing in June - £13 billion, fiscal stabilisers vicious in the cycle.

Government borrowing in June was £13 billion compared to £7.5 billion in June 2008. In the first three months of the year public sector net borrowing was £41.2 billion. This is some £20 billion higher than in the same period of 2008/9 and £ 5 billion higher than the whole of 2007/8.

Figures for April and May have been revised to the down side and June is below anticipated levels. Nevertheless, the Chancellor remains on track to hit the £175 billion borrowing target for the year. At the end of June net debt was £798.8 billion, equivalent to 56.6% of gross domestic product including exposure to the financial sector measured at some £141 billion around 10% of GDP.

In the US, policy makers are considering the need for a second fiscal stimulus to reinvigorate the economy. In the UK, such an option is not possible. The Chancellor is constrained by the existing debt and borrowing levels with no capacity for additional expenditure plans.

The fiscal stabilisers remain vicious in the cycle. In the first quarter of the financial year VAT receipts were down by £5.5 billion, of which some £ 2.3 billion can be explained by the rate reduction. A further £3 billion is explained by a 10% reduction in taxable sales into the downturn.

Taxes on income, profits NI and capital gains tax were down by £4.5 billion. Social security payments increased by over £3 billion in the first three months of the year.

For the first three months of the year over 75% of the increase in borrowing is explained by the “automatic fiscal stabilisers” and the VAT reduction. A recovery in the economy will produce a swing in revenues and a reduction in borrowing. The debt burden may be mitigated by financial sector disposals but the overhang will remain unless a realistic and aggressive programme of revenue enhancement and cost reduction is in place.

ONS : Public Sector Finances June 2009
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Prospects for the US economy - in a deep U shaped recession

“I have said on numerous occasions that the recession would last roughly 24 months. We are 19 months into that recession. If, as I predicted, the recession is over by year end, it will have lasted 24 months with a recovery only beginning in 2010.  Nouriel Roubini - Dr Doom speaks on the USA.

“Last year I argued that this will be a long and deep and protracted U-shaped recession that would last 24 months. The consensus argued this would be a short and shallow V-shaped 8 months long recession as in 1990-91 and 2001.

That debate is over as we are in the 19th month of a severe recession. The V is out the window and we are in a deep U-shaped recession.

If that recession were to be over by year end – as I have consistently predicted – it would have lasted 24 months and thus been three times longer than the previous two and five times deeper – in terms of cumulative GDP contraction – than the previous two.

“While the consensus is the US economy will go back close to potential growth by next year, I see instead a shallow, below-par and below-trend recovery where growth will average about 1% in the next couple of years when potential is probably closer to 2.75%.

“I have also consistently argued that there is a risk of a double-dip W-shaped recession toward the end of 2010, as a tough policy dilemma will emerge next year. On one side, early exit from monetary and fiscal easing would tip the economy into a new recession as the recovery is anemic and deflationary pressures are dominant.

On the other side, maintaining large budget deficits and continued monetization of such deficits would eventually increase long-term interest rates (because of concerns about medium-term fiscal sustainability and because of an increase in expected inflation), thus leading to a crowding out of private demand.

“While the recession will be over by the end of the year the recovery will be weak given the debt overhang in the household sector, the financial system and the corporate sector. Now there is also a massive re-leveraging of the public sector with unsustainable fiscal deficits and public debt accumulation.

I predict a peak unemployment rate of close to 11% in 2010. Such a large unemployment rate will have negative effects on labor income and consumption growth; will postpone the bottoming out of the housing sector; will lead to larger defaults and losses on bank loans (residential and commercial mortgages, credit cards, auto loans, leveraged loans); will increase the size of the budget deficit (even before any additional stimulus is implemented); and will increase protectionist pressures.

“So, yes there is light at the end of the tunnel for the US and the global economy. But as I have consistently argued, the recession will continue through the end of the year, and the recovery will be weak and at risk of a double-dip, as the challenge of getting right the timing and size of the exit strategy for monetary and fiscal policy easing will be daunting."

Nouriel Roubini is Professor of Economics at the Stern School of Business at NYU and Chairman of RGE Monitor. Known as Dr Doom, his comments hold equally well for the UK. As for timing, the old adage, watch the US and add six months still holds, with anticipated recovery in the UK anticipated late into Q2 2010.
Roubini - Statement of US Economic Outlook RGE Monitor
Perotcharts : CBO’s estimate of the President’s Budget
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China GDP up by 7.9%, can the dragon become the engine of world growth?

China's economy grew by 7.9pc between April and June, confirming the country recovery from the financial crisis. The economy is on course to hit the target of 8pc growth in GDP this year following growth of 7.1% in the first half.

GDP growth was 6.1 per cent in the first quarter, but a surge in bank lending and the government's 4 trillion yuan (£356bn) fiscal stimulus package has stimulated growth. China is currently printing almost three times as much new money as the United States to fuel the credit boom. Bank lending is estimated to be around 25% of GDP and money supply growth M1 is up by 25% year on year. So much for the potential strength of the Renminbi.

Factory output, commodity imports and electricity production have all improved but exports and imports remain weak. Exports have been declining for some eight months reflecting the weakness of world trade. Imports are dominated by commodities rather than net manufactures providing little stimulus to world growth. In the first half of the year, exports were down by 22% and import values were down by 25%

China’s economy is the only one of the world’s 10 biggest  expanding. Foreign exchange reserves rose to US$ 2.132 trillion at the end of Q2 2009 from US$1.9537 trillion at the end of Q1 2009 as investors abroad pumped money into stocks and property. Approximately 70% of the exchange reserves are held in Dollars.

According to the IMF, emerging economies, led by China, are set to regain growth momentum in the remainder of this year, helping the world economy to recover from the worst slump since World War II. China accounted for a third of global growth last year, according to IMF data.

Private sector consumption in China, remains at just 36% of total GDP which suggests the economy can do little to offset the slow down in the US economy, the collapse in expenditure and the increased savings ratio amongst debt stricken American consumers. The Dragon is not yet in position to become the engine of world growth.

According to Li Xiaochao, Spokesman for the National Bureau of Statistics of China,“ There are many difficulties and challenges existing in current national economic performance. The base for recovery is still infirm, the momentum for picking up is unstable, the recovery pattern is unbalanced, and thus there are still uncertain and volatile factors in the recovering progress." Apart from that ...

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UK unemployment June suggests rate of job losses slowing

Unemployment claimant count basis increased by 23,800 in June to 1.560 million. The increase in May has been modified to just under thirty one thousand. Job losses in the first quarter were 280,000. In the second quarter job losses claimant count basis are around 100,000. Things are getting worse but at a much slower rate.

The broader Labour Force survey measure increased to 2.381 million in the three months to May compared to 2.261 million in the three months February to April, an unemployment rate of 7.6%. The number of vacancies was 429,000 down 15,000 in the month.  Average earnings excluding bonuses were 2.6% from 2.7%.

For the year as a whole, expectations have been modified slightly. Unemployment is expected to increase by a further 500,000 in 2009 and by a further 200,000 in 2010. Claimant count unemployment will rise to 2.1 million by the end of the year. The headline rate will be around 2.8 million rising to 3.0 million in 2010. The rate of unemployment is likely to rise to 9% this year and over 10.0% in 2010.

The GDP forecast is based on a slow down in GDP of -3.8% in 2009 and modest growth of 0.7% in 2010. This compares with a Treasury forecast of -3.5% in 2009 and a more pessimistic IMF forecast of -4.1% in 2009.

ONS - Labour Market Statistics

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CPI inflation June falls to 1.8% - is this deflation?

Inflation CP basis fell to 1.8% in June compared to 2.2% in May, below the Government target and the remit of the Monetary policy committee. RPI fell to -1.6% and the RPIX rate of inflation fell to 1.0% from 1.6%.

CPI service sector inflation increased by 3.2% in the month compared to 3.5% in May. Once again the headline CPI rate was flattered to the downside by an increase in goods inflation of just 0.8% compared to 1.1% prior month.

Clothing and footwear price levels were down by over -8% but food (+5.4%), household utilities (+5.5%) and alcoholic beverages (+3.3%) boosted the index levels.

Only one other sector, transport was in negative territory (-1.3%) and education costs continue to accelerate up by 8.6%.

The inflation figures for June provide no evidence of deflation ahead, indeed the service sector inflation remains resiliently above target rates. The MPC is likely to retain a neutral stance with no change in the base rate until much later in the year.

As for Quantitative Easing, the MPC have adopted a wait and see stance at the present time with the allocated £125 billion almost exhausted. The immediate banking and liquidity crisis has been averted, deflation is not on the horizon, banks are still loathe to lend and the extent of any QE success has still to be measured.

ONS - Consumer Price Indices June 2009

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Producer prices fall by 1.2% in June. Deflation ahead?

The output price index for sales of manufactured products fell by -1.2% in the year to June compared to a fall of -0.3% in the year to May. Input prices for materials and fuels purchased by manufacturing fell by -11 per cent in the year to June compared to a fall of just under 9% in the year to May.

The change in output prices was dominated by a near 20% fall in petroleum prices. The contributions in the changes to the total input index were headlined by a fall in Crude oil prices (-37%), imported metals down by -14.4% and home food materials down by -9.9%.

Major increases were in the areas of imported food materials (up by 7%) and imported parts and equipment (+5.6%).

The overall output price index fall of 1.2 per cent in the year to June is the lowest annual rate since December 2001, when it was also -1.2 per cent. The overall input index fall  of 11.0 per cent is the lowest annual rate since April 1997, when it fell by 11.3 per cent. 

Volatility in producer prices especially input prices levels is exacerbated by crude oil and petroleum price trends and changes in Sterling Dollar rates. The chart demonstrates the upside swings in prices which just twelve months ago peaked at over 30% and 10% for input and output  levels respectively. Current price trends are no future indicator of deflation to follow especially as the oil price is expected to hold at around $70 according to the futures market.

ONS Producer Prices June 2009

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IMF warns the global recession isn't over, will China meet the call?

The global economy is beginning to pull out of a recession but stabilization is uneven and the recovery is expected to be sluggish according to the latest IMF World Economic Outlook. World growth in 2009 is expected to fall by 2.6%. Economic growth during 2009–10 is now projected to be about ½ percentage points higher than projected in the April forecast reaching 2.5 percent in 2010.

The IMF asserts the global recession is not over, and the recovery is expected to be slow, as financial systems remain impaired, support from public policies will gradually diminish, and households in countries that suffered asset price busts will rebuild savings. Global trade will be unable to provide stimulus. World trade is expected to contract by 12% in 2009 with export volumes in the advanced economies falling by 15%.

In the UK GDP is expected to contract by -4.2% in 2009 with growth of 0.2% expected for 2010. The US economy will contract by -2.6% in 2009 rising by just under 1% in 2010. In the Euro area the slump will impact by -4.8% in 2009.

The recovery will be slow, built “brick by brick” but half a BRIC is the only contribution in the year. Russia and Brazil, will enjoy negative growth of -6.5% and -1.3% in 2009. Growth in China and India, the other half of the acronym, is expected to be 7.5% in China and 5.4% in India, rising to 8.5% and 6.5% respectively in 2010. Given China’s low propensity to import (net manufactures), domestic growth will provide little stimulus to world economic activity.

The IMF warns bank lending conditions are expected to remain tight and external financing  will be constrained. Commodity prices have rebounded ahead of the recovery reflecting market sentiment, US Dollar depreciation and market specifics, (including the strength of commodity demand in China presumably). Forward markets signal an oil price of $74.50 into 2010 but overall inflation expectations remain subdued.

The IMF is looking forward to world growth re-balanced. In countries such as the US and the UK, which have posted large current account deficits, a contraction of domestic demand and a shift from internal to external growth will be required. By implication, the reverse will be required in countries (such as China) that posted large current account surpluses.

Will China become the new engine of world trade and growth? A change in domestic demand conditions and import propensities, sucking in world manufactures, creating a trade deficit on which the Anglo Saxon economies can feed. Generating a Renminbi surplus across the Globe and the ideal conditions for a new world reserve currency as the  Triffin Paradox partially defines. China may be looking for an offset to the Dollar exposure. A new SDR (Standard mandarin Putonghua for Syndicated Dollar Risk) but it ain’t that keen to see the Renminbi assume the role just yet. World trade and growth will remain sluggish.

IMF - World Economic Outlook

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