When is a double dip not a double dip?

The Office for National Statistics (ONS) reported that GDP fell for the second successive quarter (January to March) and so the press have heralded a recession. The much feared 'double dip'.

What are the implications of this? The most important is the impact on confidence. Consumer and business confidence is incredibly low and this will do it no good at all. We can expect people to save more and firms to hold back on investment. This is going to reduce the rise in AD over the coming months and that will hamper recovery.

An important question about the data has to be asked however. The definition of a recession as 'two quarters of falling GDP' is not a technical one. It was coined by the semi-technical press and has now passed into the literature as if it is true. Actually it is at best a guide in order to point out that a single quarter of falling GDP is not a trend. So is this definition accurate?

Actually a better definition of a recession is six months of continuously falling GDP. That is GDP falls in each month of the six. The problem of ONS data is that it is based on calender quarters, January to March, April to June etc. But this means it is quite possible for two bad months, say December and January, to make GDP appear to fall in two quarters, while in fact there was growth in four and the current trend is still for growth.

In this case it is not at all clear that there is a recession, and it is not even certain that the Jan to March figure won't be revised back to very low growth. In addition a recession usually is accompanied by rising unemployment, and yet the latest figures show falling unemployment.

What is clear is that the news alone is potentially damaging, especially as the idiot Balls will cynically exploit figures he knows to be exceptionally dodgy and encourage the very behaviour that will further damage the recovery.

The BBC page shows the news in context here

Monetary policy dilemma continues

It is possible that we are now approaching the point at which we can say interest rates will move up, possibly at the end of the year. Adam Posen, the most enthusiastic member of the MPC on easing monetary conditions, believes that the Bank has now done enough (or at least all it can).

Of course this had to happen. The markets decided this was a bit of a surprise and the pound was bid up in price, as the expected rise in interest rates was moved forward. The link between exchange rates and the interest rate couldn't be more clearly indicated.

But Posen also makes the point that interest rates alone are not enough to induce growth. Expectations, based on business confidence, are also crucial, but so is the ability to borrow money.

If the financial sector cannot lend money to businesses then even when firms believe it is worth investing and can afford the loan then the investment won't happen. The attached article shows how important it is to get all the pieces in the jigsaw in place.

The Independent article is here

Inflation figures a blip, but a blow too

The CPI figure rose last month to 3.5% (from 3.4%). The Bank of England has been saying that there was a danger of being below the 2% target by the end of the year and this is a concern for them.

The cause of the rise in inflation was mainly due to energy prices (which rose but more slowly than a year ago), food and clothing prices. These are items that monetary policy finds difficult to control as they are supply side or exchange rate driven and monetary policy works on AD.

However there is a concern in these figures for the pace of recovery. The higher inflation rate means that real disposable incomes are falling faster. Wage rises are less than 3.5% and so it means that households have less real income to spend on consumption. Also as households are very aware of inflation rates (indeed they exaggerate the rise in their minds) and this rise in inflation will affect consumer confidence. As we all know consumption is around 2/3 of AD and so short-term growth can easily be reduced.

It is pretty much impossible for the Bank of England to do more. They also believe, as do most economists, that inflation will fall for the rest of the year. (RPI did fall this month.) But this change in the direction of inflation, however temporary, may have a much bigger impact than the actual small change suggests.

The Guardian covers the story here

Just getting supply side labour market policies in perspective

This week the government changed the law on how long an employee has to work before they can claim unfair dismissal. It rises from one to two years.

This restores the situation to the pre-1997 situation and is another move that has seen the period vary between six months and two years. The argument is about getting the balance right between protecting workers from being used by employers and then discarded, and encouraging employers to take on new staff.

If employers feel that there is a financial risk in taking on staff they may not do so. If they can terminate employment without cost then they might take the risk. Under the current situation the point might be welcomed by prospective employees, but many feel it just transfers uncertainty from employer to employee and is unfair.

The aim of UK policy is a flexible labour market. Making the UK capable of responding quickly to world events and keeping the economy competitive. Contrast this with the Australian view, where even moderate reforms are seen as unacceptable, and the legislation is loaded massively in favour of employees.

This makes the Australian economy quite staggeringly uncompetitive. There are high wages for shifts, young people can't work short shifts preventing them competing in the labour market and add on costs for staff are very high. The article from The Age is a typical response to any attempt to bring supply side reform to Australia, but for us its main use is to contrast the UK and a 1970's style labour market.

You may conclude Australia is doomed once the mineral prices fall.

The Age article is here

New Keynes papers prove Keynesian's wrong

Papers belonging to John Maynard Keynes were discovered in the archives of King's College Cambridge last year. Since then academics have been studying the manuscripts dated between 1940 and 1946.

Keynes was engaged in war work throughout that period and published nothing on economic theory, although he had stated that he intended to write a revised edition of the 'General Theory' in 1938 and had told Hayek that he could 'easily deal with' those such as Joan Robinson who were using his ideas for their own purposes. Keynes died in 1946 before the revised edition had been submitted and many of the papers are his revised draft of that book.

To the distress of many Keynesians, recently crawled out from under their stones, Keynes revises his view of the economy and states that demand management techniques only have a role in the very short term.

One section states; "In periods of severe restriction of aggregate demand, such as in the period of the recent depression, {1929 - 33} then it is the role of responsible government to abandon the pursuit of a balanced budget and boost national output through deficit finance."

He continues later; "Many have taken my meaning to be that government should seek to manage the level of national output through persistant budget deficits. This would lead to unsustainable debt and ignores the crucial importance of increasing productive capacity. Generally government should seek to balance their budgets to allow the industrial sector to create the wealth necessary for growth and improved living standards."

Professor Bob Williams of the WBO commented "Keynes was clearly preparing to put the world straight on a massive mis-interpretation of his work. He makes it clear that demand management is an emergency measure only and that classical, or monetarist views were those that should be used in normal times."

Professor Lord Robert Skidelsky, Keynes' biographer is quoted in The Sunday Times as saying; "I was wrong. I am devistated. These papers make it clear that Keynes never changed his views from 'The Treatese on Money' in 1930 but saw the Great Depression as a special case. I don't know what I will do now."

Well I always said Keynesians were wrong!

Full story here