Reasons to be hopeful for economy 2010

recessions

I was looking at the scale of previous recessions. The current recession, which technically ended last quarter with a 0.1% rise in GDP, is the second worst on record.

I was surprised to find that in the Great Depression, UK GDP only fell 10%. However, it is somewhat misleading. The UK economy struggled in the 1920s (due to deflation and overvalued pound – see: Economics of the 1920s). Thus, unemployment was already high at the start of the Great Depression. In the US, output fell 30%, but, there was higher growth in the 20s and in the mid 1930s there was a strong recovery before the second recession of 1936.

Anyway there are some signs to be more optimistic about the UK economy in the forthcoming year.

Manufacturing Output. The PMI manufacturing survey from the Chartered Institute of Purchasing and Supply/Markit gave a main reading of 56.7 for January (50 indicates expansion). This is the highest reading since 1997. (link) This indicator is forward looking and gives an indication manufacturing output is likely to be growing in 2010.

Housing Recovery. House prices increased strongly in January (1.2% according to Nationwide). This growth in house prices will be welcomed by homeowners and banks (though not first time buyers still struggling with expensive prices)

Depreciation of Sterling Will help UK trade. The Depreciation in the value of the Sterling has, so far, had little impact. However, as the global economy recovers, the more competitive UK goods should help boost exports and lead to a more rounded economic recovery than just the usual consumer led recovery.

There are, of course, other reasons to be less optimistic – for example, the deflationary fiscal effect that will come from tackling the budget deficit. But, unless there is a real mess up, a double dip recession is unlikely at the moment.

Problems facing UK economy 2010

UK economy 2010

1 thought on “Reasons to be hopeful for economy 2010”

  1. Why should there be a “the deflationary fiscal effect …. from tackling the budget deficit?”

    At the moment we are financing too much government spending from borrowing. When government borrows from the private sector this is deflationary, though this is approximately cancelled out by the reflationary effect of spending this money.

    If government replaces the borrowing with tax, then roughly speaking there would be no reflationary or deflationary effect. (The alternative is to cut spending and borrowing, but let’s stick with “cut borrowing and raise tax” for illustrative purposes.)

    If there WAS a slight deflationary effect from “cut borrowing and raise tax”, that’s no problem: just reduce tax a bit and leave spending constant.

    Of course the latter involves printing money. But so what? If a reflationary effect is needed, and inflation is well under control, then finance a bit of spending with printed money.

    If inflation is NOT well under control, then that is a problem for “borrow and spend” just as much as it is a problem for “tax and spend”. I.e. the problem is not specific to printing money.

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