There's some consensus around the fact that the UK is likely to be out of recession when GDP data is announced today.
That's good news.
The bad news is that, without a doubt this had much to do with the Olympics, as, maybe, do temporarily declining unemployment figures.
Now that's not bad per se: what that proves is that government spending can stimulate the economy without detrimental consequences. No, it's bad because the Olympics is over and there's not only nothing to replace it and there are massive further cuts in progress.
The bad news is that now we've learned that in practice government spending can stop recession and the IMF has confirmed that the theory of this accords with what we can see in practice the government has not learned the lesson and is going to carry on with austerity.
Until we have a government that realises that its spending is the only way out of recession this won't change.
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Even Conservative (large ‘C’) ecoomists are now speaking out against Osbornomics http://www.huffingtonpost.co.uk/ramesh-patel/growth-cameron-austerity_b_2007552.html
I predict a triple dip before we return to a level of economic activity above the 2008 peak. I can’t see how it can’t happen unless Osborne changes plan and he won’t. This temporary boost has given him cover for another year as he will rephrase how he refers to growth from now on to make sure he includes this last quarter whilst leaving out the 3 quarters prior.
This will be the sequence of events from Osborne and his spinners.
So during next 3 months we will get
“The last quarters growth proves I’m right.”
during the next 3 months we will get
“Growth during the last 1/2 year proves I’m right”
During the next 3 months we will get:
“Growth during the last 9 months proves I’m right”
and so on.
Where are the voices questioning the ONS methodology? Or does that only apply when ONS stats are in negative territory? With Ford announcing hundreds of redundancies today and manufacturing PMI index hitting 47.7 in the 3rd quarter 2012, during what is meant to be a manufacutring led recovery, and living standards ‘down 13%’ since the start of the recession, real household incomes continuing to fall, the ‘actual’ recession felt by most lingers on. Richard: how much of the recently reported ‘growth’ might be attributed to the effect of repeated rounds of QE on the financial services industry’s ‘on paper’ performance in the London and SE economy?
I wish I could answer that question
There is a belief in some quarters that, due to QE, there is a large bubble forming in the sovereign bond market and that it will be only a matter of time before that bubble pops, taking the economy with it.
I am not sure how true this is, but one obvious solution, surely, is that since all these bonds have been paid for via printed money and since they are unlikely to find a market for them, is to simply cancel those bonds!
As what is happening is an apparent asset swap, QE money put into banks reserves in exchange for the government buying back its own bonds, there should be little risk of inflation as a result of not being able to sell those bonds and therefore “destroy” the “printed” money expended on buying them.
Cancelling these debts will simply recognise the reality that they are never going to be sold again
I suppose it was rhetorical to an extent; ‘normal’ rules no longer seem to apply so there probably isn’t an answer.
An ‘asset swap’ says Stevo!!, referring to gilts, but is it only gilts being exchanged for QE money and at what value? My concern is that good QE money is being exchanged at mark to fantasy levels for worthless rubbish the banks have got on their books – old mortgage securities for example – and can’t possibly unload. How would I find out if this is indeed the case?
“Cancelling these debts will simply recognise the reality that they are never going to be sold again”
But in my book, that can only be a good thing. What do you think, Richard? And do you think there is a bubble in sovereign bonds as some commentators believe or not?
The first estimate is based on large company returns anyway. Moreover, if you fiddle the basket of goods for measuring inflation to help under record that, when you re-constitute “real”-“seasonally adjusted”-GDP from nominal figures it comes out with a surprisingly large number.
So given that actual households experience higher inflation the nominal GDP growth is more than accounted for in higher prices rather than higher output.
So depending on how much you want to torture the data you can get any result you want to.
“With the QE effect boosting stock markets and with many of the UKs largest quoted companies having operations in commodities and emerging markets with strong growth”, this will have boosted their investment earnings and profits. Could it be that, without any of that earnings and profit growth necessarily being felt by the wider economy, this boost has show up on the growth figures released today?
“By the end of the first round of QE1 in January 2010 the FTSE 100 had risen a massive 42 per cent to 5,188 and everyone breathed a sigh of relief,”“ Mr Ralfe said.
Without gilts purchases, according to the BoE’s methodology, the FTSE 100 would have been 4,323, not 5,188.
Some 21 months later, QE2 began and in the interim period, the FTSE had crawled up by only 7 per cent to 5,544. By the end of QE2 in May 2012 the FTSE 100 was down 4 per cent to 5,320, despite the Bank’s estimate that QE2 boosted share prices by a further 12.5 per cent.
Between the effects of the first two rounds of QE, the stock market rose by 46 per cent. Without QE, it would only have risen 8 per cent to 3,940, based on BoE calculations.
Equity market strategists have noted that many factors are affecting equities prices beyond QE and quantifying its effects can be difficult. For example, many of the UK’s largest quoted companies have operations in commodities and emerging markets experiencing strong growth which has boosted earnings. On the other hand, equities prices have been held back by fears of unravelling within the eurozone.”
http://www.ft.com/cms/s/0/9a323490-f202-11e1-bba3-00144feabdc0.html#axzz2AJeoIUik
Is the whole QE operation acting like the Dow plunge protection team in the US then?
And the news just gets less believable…….
“Retired people should be encouraged to do community work such as caring for the “very old” or face losing some of their pension, a peer has suggested”
http://www.bbc.co.uk/news/uk-politics-20044862
Retired people with pensions at Equitable Life and other failed funds will think that the miserable Lord Bichard’s plan has already been enacted.
Smoke and mirrors ?
http://notayesmanseconomics.wordpress.com/2012/10/25/why-was-the-calculation-of-uk-gdp-changed-lower-recorded-inflation-so-higher-growth/
This is a very good analysis. Obviously the statistical approach is meaningless so salesman Cameron has taken the psychological path and announced that everything is getting better. Perception plays a very important but immeasurable part so we must use this to our advantage.
Insofar as money creation is concerned, or as Prof Richard Werner calls it, quantitative easing, I understand that BoE is reluctant to infer what effect it actually has on these statistics.
As you say, John – just smoke and mirrors.
Well, the government have been proved right and the doubters have been proved wrong! Growth in the British economy has rocketed to a mind-blowing…….er – 1 percent!!
Presenting this temporary olympic bounce as the economy turning the corner is quite laughable! It should be remembered that the government is only one-fifth of the way through its public sector cuts programme. Including the extra £10 billion it intends to chop from benefits, around £90-£100 billion is going to be chopped out of the economy. As discovered in Europe, government debt has actually gone UP rather than down despite brutal austerity measures. This is because taking more and more money has shrunk EU countries’ tax take and shrunk their GDP. Only the debt does not shrink – it remains the same, meaning more self defeating cuts or more borrowing is needed to make up the difference.
As you quite rightly say, Richard, it is the temporary spending on the olympics which has largely helped this temporary blip, and believe me, it will be temporary. Don’t take the apparent drop in unemployment in account for adding to better economic figures, There is mounting evidence that these unemployment figures have been massaged! By the way, before anyone else jumps in, yes – I know Labour did the same thing, to their shame!
The construction industry, one of the main things that should be leading us out of recession is still being allowed to die on its arse.
As long as there is no real demand in the economy, there will be no real growth. Indeed, there can’t be while the government intends sucking tens of billions of poinds out of the economy each year,
Last night I stumbled across a documentary on BBC”, “War Farm”. It was about farming during WW2, but the really interesting part of it was how much fun it looked. You had the whole community pulling together to make their own food, cut their own fuel, have their own entertainment etc. It seemed a positive experience for all involved. And it did make me think about “economic growth” and really whether it is either sustainable or desirable.
The easiest way to get economic growth is through exploiting natural resources at an unsustainable rate. Miners ploughing up the earth, chemical companies producing aggregates, builders constructing roads and houses, manafacturers making new products to replace those that could be repaired. But does this create wealth or happiness in any sense if it is at the cost of atomising society?
I really hope that we don’t get back to economic growth and instead this period becomes the chance to re-evaluate all values. There are signs already that the Greeks and Spanish are thinking this way. Perhaps the Starbucks backlash is a sign of British people starting to question globalisation and growth, that perhaps 3,000 independent coffee shops are better than a chain of 3,000 coffee shops in all meaningful senses (other than economically, where independence means inefficiency). But it would be good if some politicians could start thinking the unthinkable. Fat chance mind.