Policy Research in Macroeconomics

UK economy: the growing negative impact of negative growth

While preliminary estimates of GDP can be out by a few decimal points, today’s negative figure for the first quarter of 2012 (-0.2% from Q4 2011) is bad enough news for the government. And all the more so since it shows the UK to be in ‘technical recession’ – even if the word ‘technical’ seems a little too, well, technocratic for those bearing the brunt of the consequences.

If over the last two years, the ONS has sometimes seemed to be searching for ‘government-acceptable’ excuses for disappointing GDP figures (“it’s the snow, the warm weather, the Royal Wedding…”), on this occasion the worm appears to have turned. A brave note by Ms Malindi Myers of the Office for National Statistics, accompanying the GDP bulletin, pulls no punches:

 “Over the past year the economy has therefore not grown at all, and total output is now 0.2 per cent lower than it was six quarters ago, in the third quarter of 2010.  While GDP fell by 7.1per cent from peak to trough during the recession in 2008 and 2009, it has subsequently recovered less than half that loss, and output is still 4.3 per cent below its pre-recession peak.”

 She also points out that 4 of the last 6 quarters have shown (horrible phrase) “negative growth”.

Prime recommends this note in its entirety to readers interested in the evolution of the different sectors of the economy.

What is notable, above all, is that the figures are so poor compared to all the recent spin and talking-up of the prospects for the economy.  Underlying it all, despite the export prospects from a modest US recovery, we have to recall that the UK’s main trading partner remains recession-bound EU.  Even if exports to BRIC countries grow, this will be from a very small base. So the key element of the government’s strategy – to export our way out of recession – is now closed for the foreseeable future.

Within the UK, real incomes trail behind inflation, and unemployment remains very high.  And remember, we are only at the start of the government’s public sector reductions – the tax rises are mainly in (we are told), but it’s now time, under the Government’s plan, for government departments to start cutting.

Time to focus on employment and positive economic activity!

The important issue, of course, is how to get useful economic activity going again, how to create good quality employment, with the overall mix of full and part-time employment reflecting broadly people’s wishes and needs, as well as those of business.

According to the latest ONS figures (18th April), the number of people in employment aged 16 and over increased by 53,000 on the quarter to February 2012, but fell by 57,000 over the full year to February. However, the number of part-time workers increased by 80,000 on the quarter to reach 7.94 million, whilst the number of full-time workers fell by 27,000. The number of people working part-time because they could not find a full-time job increased by 89,000 on the quarter to reach 1.40 million, the highest figure since comparable records began in 1992.

The unemployment rate for the three months to February 2012 was 8.3%, with a small reduction of 35,000 over the quarter to reach 2.65 million. So beneath the positive headline (“unemployment falls”) the reality is that more and more people are taking up part-time work, but want to work full-time.

The number of unemployed men fell by 43,000 to reach 1.51 million, but the number of unemployed women increased by 8,000 to reach 1.14 million, the highest total since 1987. The number of people unemployed for over 12 months increased by 26,000 to reach 883,000, the highest figure since September 1996.  The unemployment rate is Europe as a whole is now over 10%.

There can be no question, therefore, that there are many people willing and able to work, in the UK and the European continent – the main problem is on the demand side.  We need a major programme of job-creating investment, which at this stage has to be mainly public-sector driven (the private sector is not doing it…) which produces a positive return for the economy.  Research, infrastructure, the greening of our economy…

That is why the response today to the GDP figures from Chancellor George Osborne is so concerning, when he states (ignoring the multiplier effect of well-planned investment):

 “The one thing that would make the situation even worse would be to abandon our credible plan and deliberately add more borrowing and even more debt.”

 And that is why this Monday’s speech by Jens Weidmann, President of the Deutsche Bundesbank on 23rd April in New York is likewise so dismaying, when he says:

  “In my view, the risks of frontloading consolidation are being exaggerated. In any case, there is little alternative. In the end, you cannot borrow your way out of debt; cut your way out is the only promising approach.”

 This on the day after Marine Le Pen gets over 18% of votes in the French Presidential election, including some 30% of working class voters, and when right-wing populist Geert Wilders decides to bring down the Dutch government claiming that, after all, he too is against EU-led reductions in public spending.

And this is why the politics of austerity are so dangerous, politically as well as economically, in the UK and across Europe.

2 responses

  1. “We need a major programme of job-creating investment, which at this stage has to be mainly public-sector driven (the private sector is not doing it…) which produces a positive return for the economy. Research, infrastructure, the greening of our economy…”
    It doesn’t have to be investment. The obsession with ‘investment’ gets in the way of the actual root cause of the problem – lack of spending.

    Investment should be happening anyway regardless of the economic situation – and that requires a sober assessment of how much non-labour resource needs to be taxed away from the private sector.

    The first move should just be to give poorer people money to spend and pay down their debts (preferably in return for their labour which can then be supplied to the voluntary sector). See where that gets us.

    Once you get demand up, you’ll get investment from business. Public investment then needs to happen alongside that as part of a consistent plan – not a response to a slump.

  2. We are told ad nauseam that we are in a recession, when there are two quarters of “negative growth”. What we are not told is when the recession ends. With output still 4.3 per cent below its pre-recession peak, I don’t believe we’ve come out of the first recession yet!

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