Dips or a Pancake – the UK economy

The UK does not have an official definition of a recession, so the media use the US definition of two consecutive quarters of negative growth in the size of the economy. Measuring the size of the economy is a hugely complex task that takes three to six months to do properly. However the markets and media are only interested in the first estimate that is produced about three weeks after the end of each quarter. Then they only look at the change of that result from the previous quarter – if the answer is less than zero then recessionary conditions are proclaimed, if between zero and one half of one per cent then it is sluggish growth and if above three-quarters of one per cent then Britain is booming. The margin between deep gloom and euphoria is amazingly small – when one adds to this the fact that the average size of error between the first estimate and the final figure is about 0.3%, then it is easy to see why instant newspaper headlines following quarterly GDP data can often turn out to be very misleading.

The first estimate recently published for Q1 2012 UK growth was -0.2%, this followed -0.3% for Q4 2011 and so satisfies the working definition of a recession; worse still because there had been such a poor recovery since the last recession, it can also be called a “double-dip” recession, adding further hyperbole to the headlines. There are at least 11 other EU nations who are also in recession with a few more still to report. For those who follow the detail, the surprise in the data came from construction spending, which had it been in line with expectations would have  brought growth up to +0.1% and prevented the headlines about recession. The National Statistics Office has for some time now had problems in accurately calculating construction spending and keeps changing how they measure it, and when one adds to that the fact that there is normally relatively little construction work done in winter and so substantial seasonal adjustments have to be  made to the data, but that this winter the weather was surprisingly good, then quite frankly nobody will know for some time what the correct numbers might be.

The last 6 quarterly reports have been -0.5%, +0.2%, -0.1%, +0.6%, -0.3%, -0.2% – the most sound conclusion that can be drawn from this is that for eighteen months the economy has been flat and growth has been zero. Within that the public sector has seen slightly negative growth (but only slightly, see here), the private sector has seen slightly positive growth (but not enough to stop unemployment rising) as at home consumers fear for their jobs and in the Eurozone, our largest export market, significant and painful austerity is being imposed. Additionally, loan growth is negative as consumers, companies and banks all seek to reduce their debts and hold more cash, rather than invest for the future.

This “flat as a pancake” picture is likely to continue, but the risks are much more skewed to a worse outcome than they are to a better one. At a zero rate of growth, the economy is very vulnerable to any external shock quickly sending it into recession, and western policymakers have very limited policy options available to mitigate any such shock. Fiscal deficits and debts are already too large and need to be brought lower and so provide no scope for fiscal stimulus, whilst monetary policy has rates close to zero and only further Quantitative Easing as a policy tool which is showing a clear pattern of diminishing returns, each time it gets deployed.

This UK government has only ever had a Plan A, and so is sticking firmly to it, mostly because there are no decent Plan Bs anyway, and has always relied on the rest of the global economy being in a reasonable state. However the pancake is better than the dips.