Sweeties and sours - Economics weekly


Sweeties and sours - Economics weekly

Nostalgic readers may remember the 'double dip' as the favourite sweetie of the late 1980s. With two flavours of sherbet to dip your lolly into, that double dip was a lot more palatable than the UK economy's current sour version.

Economic Analysis

30 April 2012

A contraction of 0.2%q/q in Q1 puts the UK back in recession. But first estimates are often revised, and it's where we go from here that matters now. Sadly, there are few hopes of a rapid pick up in growth on the horizon. Europe is struggling on but Spain's fragile banking system is adding to tensions. Meanwhile the US recovery looks like it might be more sluggish than hoped. Inflation and unemployment are disappointingly stubborn and the housing market is still a drag. Whatever you call it, economic recovery is going to be a marathon, not a sprint.

Double-dip trouble

The UK economy shrank by 0.2% in the first three months of the year, meaning the UK has suffered its first 'double-dip' recession since the 1970s. Four years on the UK economy remains almost 4% smaller than it was at its peak in 2008. To put this in context, even through the Great Depression the UK economy had recovered lost output after three and a half years. Only one sector is spending or producing more now than it was in 2008 - Government and Other Services. It grew by 1.1%y/y in Q1 and is more than 5% larger than in 2008. It's here that economics and politics clearly diverge. The figures show that the recession cannot be pinned directly on lower government spending. Yet it's difficult for the Coalition to defend this because it flies in the face of their policy to reduce it.

Government borrowing on track so far - but there's harder work to come

Public sector net borrowing was £126bn in the 2011/12 fiscal year, 8% lower than 2010/11. Borrowing forecasts set out in the last two budgets have been very close to the mark - unusual for public sector finance statistics. But it didn't all go to plan; receipts in 2011/12 were £16bn lower than expected. The numbers show that Government borrowing is falling, but targets will be more difficult to achieve in future. So far most of the improvement has been driven by tax increases (VAT). 90% of spending cuts are still to come. With the UK now in recession Mr Osborne is going to have tougher political challenges ahead too.

UK consumer confidence picked up in March

After a slump in February, Nationwide's consumer confidence index rose to a nine month high in March, although at 53 it's still well below the long run average of 76.The breakdown shows that consumers have become more optimistic about the future - especially the economic situation. This is puzzling given the latest GDP figures, but a welcome improvement in sentiment all the same.

Eurozone private sector activity continues to worsen

The composite Purchasing Managers' Index (PMI) fell for the third consecutive month in March and at 47.4 remains firmly in the sub-50 contraction territory. The manufacturing index fell significantly too following a worryingly sharp decline in new orders across the whole euro area. The service also sector declined sharply, from 49.2 in March to 47.9 in April. Firms reported reduced headcount and low levels of business confidence for the coming year - quite understandable, especially as the Eurozone economy is expected to shrink in 2012.

The Fed expects US growth to continue to pick up, albeit gradually

The latest Federal Open Market Committee (FOMC) meeting left US monetary policy unchanged, but did note the pick up in inflation and disappointing labour market conditions. The commitment to keeping US rates close to zero until 2014 still stands, but with a little less support and no hint of any further monetary easing. Overall the FOMC thinks that the US recovery will continue and revised up its growth forecasts modestly. GDP is now expected to grow by c2.5% in 2012 and by c3% and c3.5% in the following two years. But just like the rest of the world, the US recovery depends on stability in global financial markets, and this is still at risk from the Eurozone, especially with growing tensions in Spain.

US house prices fell 3.5%y/y in February

US house prices are still falling, but a glimmer of hope is that they are falling less quickly than they were. Prices fell by 0.8% in the month, less than the 1% fall the previous month. But prices are still around a third lower than at their peak and it's likely to be some time yet before price growth returns. Foreclosures are still high and even though new home starts are falling, there is a huge pool of supply which needs to be mopped up before things can begin to get better. It's the opposite case in the UK where a lack of supply, from both possessions and new building, is preventing prices from falling faster.

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