Unfortunately, despite the post-Olympic bounce in GDP, other aspects of the UK economy look pretty grim. In manufacturing and industrial output, there has been no real recovery. In manufacturing it is not so much a triple dip recession – more a prolonged double dip. Manufacturing output is 2.1 per cent lower in October 2012 compared with October 2011;
Source: ONS
Looking at data since 2007, we see a similar pattern to GDP.
Source: OBR Dec.2012 Public sector net debt as % of GDP is forecast to start falling in 2016-17. The OBR forecast a decline in public sector net borrowing to 5.1% of GDP in 2012/13. Before increasing to 6.1% of GDP in 2013/14 Part of the decline in the budget deficit 2012/13 can be attributed to …
This graph illustrates some of the different causes of the US budget deficit.
Source: CBO estimates 2012 | via Krugman
This shows how the deficit has been affected by certain issues.
The particular graph doesn’t show other factors affecting the budget deficit, such as growth in health care spending, the cost of social security and factors related to an ageing population. But, it is interesting to see $0.9 trillion of the 2009 deficit (roughly 75%) was caused by cyclical factors.
Quantitative easing is a process where a Central Bank creates money electronically. It uses this new money to purchase assets and bonds (mostly government bonds) from commercial banks and financial institutions. For more see: Quantitative easing explained Quantitative Easing has helped many holders of government bonds who have benefited from selling bonds to the Central …
In the lead up to the Euro debt crisis, there was a marked divergence in competitiveness within the Eurozone. In fact, some economists suggested that the currency imbalances were the root cause of the Eurozone fiscal crisis. (VOX article)
However, recent evidence suggests some restoration of competitiveness within the Eurozone.
We can examine competitiveness in a couple of ways. To see the divergence in competitiveness, we can look at unit labour costs. Relative to Germany, unit costs tended to rise much faster in southern Europe. The graph below shows the divergence of southern European economies compared to Germany. Remember in the Eurozone, this decline in competitiveness could not be offset by devaluation.
This decline in competitiveness was reflected in substantial current account deficits in the south, and current account surpluses in the north.
By 2008/09, countries such as Portugal, Greece, Ireland and Spain had achieved record current account deficits.
This research from the OECD suggests a significant restoration of competitiveness. Note, it includes forecasts for 2013 and 2014. This change in relative competitiveness would explain, at least, part of the fall in current account deficits in southern Europe.
Readers Question: Can you tell what Portugal has done to reduce the Current Account GDP deficit so steeply?
The reduction in the Portuguese deficit is quite striking. In researching the answer to this question, I came up with a different post – The Portuguese Economic crisis
From what I can gather, essentially, the rapid reduction in the current account is due to a sharp fall in consumer spending on imports, combined with some growth in exports – helped by improvements in unit labour costs. However, bear in mind, I may have missed out a few other reasons due to lack of data.
1. Fall in consumer spending on imports.
Portuguese economic growth compared to Germany
As mentioned in The Portuguese Economic crisis Portugal has seen the biggest fall in real GDP (apart from Greece) in the Eurozone. Portuguese consumers have seen a rapid fall in disposable income due to a combination of tax rises and public spending cuts. With lower income, Portugal is simply buying less imports – this improves the current account.
By any standards, 2012 has been a dismal year for the UK economy. Despite a temporary Olympic bounce, GDP remains below 2008 levels, and the Bank of England is as pessimistic as it’s ever been. Unemployment might be lower than other European economies, but with 1 million underemployed – official statistics perhaps mask the wasted resources in the economy.
GDP is 3.1% below where it was when the recession began 18 quarters ago in early 2008.
The Chancellor has a lot of bad news to contend with.
In his defence, you might point to the Eurocrisis and say it is inevitable the UK economy was harmed by the slowdown across the channel.. But, despite the recession in the Eurozone (which have problems relating to single currency), it is hard to avoid the fact that two and half years into the job, he has to take responsibility for the direction of the economy.
Essentially, Osborne started the job with great fanfare about reducing the deficit. Deficit reduction was sold as the most important objective – the implication was that without immediate cuts, the UK could end up like Greece or Italy.
But, unfortunately, the experience of the past two and half years is that fiscal consolidation during a recession tends to be counter-productive (austerity will increase deficit). Freezing public sector spending, whilst the private sector is still very fragile, has led to a large negative multiplier effect. It is hard to avoid the conclusion that the double dip recession is largely the fault of economic policy.
A look at the future prospects for the Pound in the coming months of 2013.
The Sterling index measures the value of the Pound Sterling against a basket of trade weighted currencies.
This modest appreciation in the Pound has occurred despite:
Therefore the appreciation in the Pound is not so much a reflection of the strength of the UK economy – but a reflection of market nervousness about other currencies. In particulary, given the Euro crisis and difficulties of Eurozone economies, the Pound offers a greater semblance of normality and confidence.
However, given the weak state of the UK economy, it is likely that the fortunes of the Pound could deteriorate in 2013 – especially against the dollar and currencies other than the Euro.
In particular, the growing UK current account deficit (now over 5% of GDP) suggests underlying lack of balance between imports and exports.
The UK has one of the largest current account deficits in the OECD. There are other reasons to explain the current account deficit, but the widening of the deficit to over 5% of GDP, suggests the Pound is becoming more uncompetitive against its main rivals. In a floating exchange rate, this is likely to lead to some depreciation in the future.