The problem of measuring

Deps have already encountered the issue of measuring GDP. There are plenty of reasons to suppose it is not an exact science.

Today the GDP figures for the April - June period (the second Quarter) were revised for a second time. It was good news as the fall in GDP was less than previously reported meaning the recession is not as bad as was thought.

The article explains some reasons why the figures reported originally were wrong

The BBC explain the change here

Oh dear, oh dear, oh dear

A government statement here

Britain reported a third quarter of falling economic growth on Wednesday. This is exceptionally disappointing news and leads to a situation where action to at least make people feel better seems inevitable.

The raw figures were that GDP fell by 0.7%. There are factors to be taken into account that mean the fall is as not as bad as it seems, but once they are accounted for GDP would still have fallen. This 'second recession' means that the UK is far from a recovery that will provide the income and jobs people need.

It is an odd type of recession however. It's a recession that is creating jobs, 180,000 in the last three months. That is not typical, recessions should see fewer jobs.

So what is the cause of the problem?

* The main problem is the world economic situation. Markets are weak and so sales are down. The continuing Euro saga means that confidence is low in financial markets and with the overhang from the 2007/8 global financial crisis banks are not lending.

* The EU is the UK's largest export market and recession there means that they are buying less from us. This shows how interdependent economies are.

* Consumer confidence is very low which means consumers are saving (about 8% of income at present, up from 1 to 2% during the period before 2008).

* The governments of the world are very concerned about the level of debt they hold and are making efforts to reduce it. This means higher taxation and lower government spending (and jobs) and so in the short term this helps to contract the economy.

Some people argue for greater government short-term stimulus to rectify the current problems. This would mean stopping the deficit reduction program (or at least delaying it). It also means government investment in infrastructure and probably tax cuts.

Most people completely overestimate the ability of governments to influence economic activity. Governments are actually pretty powerless even when they act together, but when they are seen to be acting this often raises consumer and business confidence. That seems to be the key now, not actually what is done, but being seen doing more.

Of course the weakness of the financial system will remain and it is, frankly, a house of cards which could collapse at any moment. But for once the illusion of Keynesian style stimulus packages might actually be what we need and its about time these cheap conjuring tricks were given top billing.

The BBC have the figures here

Fall in Real GDP can't be good news

The UK economy shrunk last quarter by 0.2%. This should be a period of recovery and growth after the recession and so not at all what was hoped.

However, if you can see the BBC graphic in the story below, you will notice that the economy shrunk by 0.5% in the equivalent quarter in 2010. After that growth returned, 'caught up' in fact, so this may not be a return to recession. Remember one observation is not a trend.

What is clear is that growth is pretty flat and nowhere near the levels the economy needs. The Deputy Prime Minister, Nick Clegg, has called for a stimulus measure, raising the tax free threshold to £10,000. This will raise the disposable incomes of all tax payers, but the biggest effect will be on the low paid. They tend to spend a higher percentage of their earnings and so this will raise consumption and boost Aggregate Demand.

Would such a stimulus work? Well it depends on whether the tax cut is spent or saved. Also would a boost of £7 a week really help that much?

The BBC cover the growth figures here

Growth improves, but one swallow does not make a summer

The UK economy grew 0.5% in the third quarter (July to September) which was a welcome relief after the second quarter growth of just 0.1%.

While 0.5% may not seem like a lot it is actually a huge improvement and a welcome sign in an economy that needs growth badly. Unfortunately part of the improvement is a 'rebound' from the poor second quarter - a 'catch - up' rather than a clear upward trend.

The figures hide differences between sectors. Services and finances showed their strongest growth since 2007, but manufacturing continues to struggle.

There is talk of recession. Let's be clear on what that means - falling GDP, not slower growth. A rule of thumb is that a recession is two consecutive quarters of falling GDP. This remains a possibility, especially if the Euro collapses.

It may be useful to talk about the stages of a recession and policy responses. This can be illustrated in the excellent BBC graphic on the linked article showing the path of previous recessions.

Stage 1 - Falling GDP. Here there is falling output and the immediate policy response to slow the fall in GDP. At this stage fiscal and monetary policy are set to expansionary settings and the challenge is to stop the recession being as deep as it otherwise would be.

Stage 2 - Levelling out. Here the crisis is not over but the economy has stopped shrinking. Fiscal and monetary policy continue to try to boost Aggregate Demand to help use up spare capacity. Unemployment will continue to rise, probably faster than in Stage 1 as firms let worker go and adjust to the new level of demand. Workers entering the workforce find it difficult to find jobs as firms are not hiring.

Stage 3 - Recovery. In this stage the economy begins to grow. Unemployment remains a problem, continuing to rise, especially among young workers. They have no experience and are expensive to employ. Firms are cautious and confidence is low among consumers as well.

This is the most challenging phase in terms of policy. The challenge in this phase is coping with unemployment and preventing a large group of long-term unemployed. Expanding AD may not work and supply side measures, that will target the structural and youth unemployment, take a long time to work. Productivity increases alone may mean few extra workers are needed for the modest rises in GDP.

Stage 4 - Return to growth. This stage is elusive. Productive capacity begins to increase as well as demand. It is not clear when normality will return and as the BBC graphic shows it is taking longer to get there than in previous recessions. This is mainly due to the greater extent of the recession and the fact it originated in the financial and not the goods market which makes fiscal stimulus largely ineffective in stages 2 and 3.

None of these stages has a fixed time-frame of course, adding to uncertainty.

Apologies for a long post, this has been on my mind for a while!

The BBC article is here

UK economic growth cut to 0.1% for April to June

These figures released yesterday have led to the usual argument over potential policies. These are the usual demand management options. The calls are coming for the government to increase spending and for the Bank of England to adopt QE. It is important to remember the source for the financial downturn which is greatly influenced by the poor economic performance in Europe.

Guardian Article Here