David Blanchflower: Slasher Osborne's in deep trouble – as new growth gloom is about to show
Economic Outlook: Government cuts are set to become an even bigger drag on growth
Monday 16 April 2012
The storm clouds continue to gather over the British economy. Last week, two ONS data releases gave us insight into where the economy is and, importantly, further indication of what the first estimate of the GDP first-quarter growth rate is likely to be when it is published on April 25.
With awful industrial production figures, rising unemployment and poor retail sales, the numbers – on construction output and net trade – suggest to me there is a better than 50-50 chance that number will be negative. This would imply the UK is already in a technical double-dip recession, which occurs when there are two successive negative quarters of growth. That, rightly, would generate a political storm.
The data on construction showed the sector is likely to be a net drag on growth. Construction output in February was 17 per cent lower than in November and 4.6 per cent less than a year earlier, which was considerably worse than economists had expected. Even though construction accounts for only 8 per cent of the economy, if these numbers are repeated in March they would represent a significant downward pull on GDP growth.
The trade figures were especially shocking. The UK's deficit on seasonally adjusted trade in goods and services rose to £3.4bn in February from £2.5bn in January. Negative net trade also lowers GDP growth. The numbers are presented in the table above.
The deficit on seasonally adjusted trade in goods was £8.8bn in February, compared with £7.9bn in January. Excluding oil and erratic items, the seasonally adjusted volume of exports was 5.3 per cent down and the volume of imports 0.9 per cent lower in February, compared with January.
The deficit increased further in February to £3.4bn. This was driven by a 2 per cent monthly drop in export values while import values edged up by 0.2 per cent. January's deficit was revised down from £1.8bn to £2.5bn, extending the pattern of downward revisions we have seen to almost all recent economic data releases.
Of particular note is that the worsening balance of trade in goods is not principally due to the weakness of the Eurozone, although it almost certainly will be soon. It worsened sharply because of a decline in exports to non-EU countries, from £12.8bn in January to £11.7bn in February. Indeed, the balance of trade in goods to the EU in February was less than a year earlier (-£3.8bn compared with -£4bn). To this point, the government can't really blame its problems on the slowing Eurozone, which is the UK's major export market. It isn't as if it didn't know about the problems in the Eurozone when it launched its reckless austerity programme.
That situation is set to worsen because GDP growth in the Eurozone was -0.3 per cent in Q4 2011 with 12 of the 17 euro area countries having negative growth. Greece is likely to be heading back into recession, and there is little sign of improvement in any of these countries. The OECD forecasts negative growth for the weighted average of the three largest euro countries, France, Italy and Germany, for the last quarter of 2011 and the first one of 2012 – as it is for the UK, which would mean all would be in double-dip recession. As my friend Nouriel Roubini has said: "The trouble is that the Eurozone has an austerity strategy but no growth strategy." Sound familiar? Developments in Spain last week, where bond yields rose to 6 per cent, and in Italy where they also rose, suggest the euro crisis is back and more bailouts are on the way. It is hard to see how net trade is about to make a positive contribution to UK growth.
The table of the latest forecasts from the Office for Budget Responsibility shows the expenditure contributions to growth from the six major components – private consumption, business investment, dwelling investment, government, inventories and net trade. What is clear is that net trade is supposed to contribute half the growth of 0.8 per cent in 2012, which is not going to happen. Plus the OBR believes net trade will make a major contribution in 2013 and to a lesser degree in 2014 and 2015, which seems fanciful. The 10 per cent appreciation of sterling against the euro over the last nine months certainly won't help.
The OBR's past forecasts have been overly optimistic, embarrassingly being revised downwards in every subsequent forecast, and the latest is inevitably going to follow in that tradition. For example, in its June 2010 Budget forecast, the OBR predicted that in 2011 business investment would grow by 8.1 per cent whereas the actual outcome was 0.2 per cent.
The OBR forecasts growth in investment of 6.4 per cent in 2013, 8.9 per cent in 2014 and double digits after that, and consumption growth of 1.3 per cent in 2013 rising to 2.3 per cent in 2014 and 3 per cent after that. Same forecast pushed out a year or so. Wrong then, wrong now. Dream on.
The table makes clear that government cuts are set to become an even bigger drag on growth as we move towards an election, with the deepest in 2015. But never fear, apparently private consumption and investment will pick up in 2013 along with dwellings investment, and growth will accelerate. Even though they didn't in 2011 and don't look like they are going to in 2012. Pigs might fly.
The evidence from the Bank's Agents latest report is that consumer demand is growing 'only at a gradual pace' while investment intentions "point to only modest growth in capital spending over the coming year". The EU's Economic Sentiment Index for the UK dipped again in March, driven by a big drop in confidence of retailers, and at 91.4 is well below its level of 102.4 when the coalition took office in May 2010. So it doesn't look like things are going to get better any time soon. Slasher Osborne's austerity plan is in deep political and economic trouble.
David Blanchflower is professor of economics at Dartmouth College, New Hampshire, and a former member of the Bank of England's Monetary Policy Committee
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