Monday, 24 May 2010

How's the UK economy doing?

Some news has been creeping in which gives us a picture of the British economy that's gradually becoming clearer. First, from the ONS via David Smith:
Business investment for the first quarter of 2010 is estimated to be 6.0 per cent higher than the previous quarter.
From the same source, some news on public borrowing: December, the Treasury preducted public sector net borrowing for 2009-10 of £178 billion on the definition it uses. The latest figures from the Office for National Statistics show a downward revision to the outturn, taking it to £156 billion...At one time people were predicting figures as high as £220 billion.
Recent growth estimates are decent (though not outstanding) too:
Gross Domestic Product (GDP) increased 0.2 per cent in the first quarter of 2010, compared with an increase of 0.4 per cent in the previous quarter.
There was a concern prior to the release that growth might be negative, due to heavy snow in January and February. So growth of 0.2%, though hardly vibrant, was a relief. And growth figures for the previous two quarters have been revised upwards by 0.2-0.3% after the initial release - we can't be sure that will happen this time, but in any case I think we can expect strong figures in the second quarter.

Finally, there's a surprising leap in inflation over the last few months:
CPI has risen from 1.1% in September to 3.7% now and the Bank will be hoping its reversal is just as dramatic. RPI inflation has gone from minus 1.4% to 5.3%. RPIX, the retail prices index excluding mortgage interest payments, is now at 5.4%, more than double its old target of 2.5%. CPI is a long way from its 2% target.
So what is happening? Two things, it seems to me.

First, demand is returning. The property market has recovered well from the depths of the recession, business investment is increasing and consumer demand has held up well because unemployment did not rise as much as feared. This is helping to fix the public deficit - in addition to which, that 3.7% inflation figure reduces it by the equivalent of another £6 billion (exactly as much, coincidentally, as the public spending cuts announced today).

Second, supply is constrained. Because unemployment only rose a bit, there is not a lot of spare capacity (apart from some marginally productive ex-employees) to keep prices down. Hence the inflation figures. This does not speak well for the flexibility of the British economy, though it has helped to sustain the momentum of aggregate demand. If UK companies don't find some hidden reserves of productivity, we won't be able to get the surge of growth that I hope is coming in the recovery. (Note, however, that the figure is not quite as bad as it seems - over a third of the inflation figure comes from January's VAT rise, and the total without it is only about 2%).

I am not sure whether I'd rather have a US-style economy, where a jump in unemployment in the recession is followed by fast growth in the recovery, or a French-style one, where employment and demand are sustained at the expense of future growth. I hope that the inflation is only an outcome of quantitative easing and the weakness of the pound, and that we'll be able to get both decent growth and a recovery in jobs over the next year.

Posting partly inspired by Nick Rowe's question on TheMoneyIllusion.

1 comment:

Timbo614 said...

hmmm. so what happens to your hopeful inflation outlook when VAT goes to 20% or 20+% in October? Not good eh?

Inflation may pay down international debt but it does nothing for the indigenous population - it actually does the opposite of nothing.
We can't grow our way out any more.
You are dreaming, it's poppycock. Who is going to buy our exports? Everyone is trying to export and without major upheaval I don't see the UK exporting much at all. Yes we have intellectual and invention rights to sell and financial skulduggery. But what about hard, tangible goods? hmm..?

The worlds problems can only be postponed by global debt default. Personal, corporate, national and international debt jubilee. What say you, to a jubilee?