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Snow joke: GDP shrinks more than expected


9:46 am - February 25th 2011

by Left Outside    


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Fresh from the Office of National Statistics:

UK gross domestic product (GDP) in volume terms decreased by 0.6 per cent in the fourth quarter of 2010, revised down from a decrease of 0.5 per cent published in January.

This was not due exclusively to snow either, although it clearly had an impact:

The disruption caused by the bad weather is likely to have contributed approximately 0.5 percentage points of the 0.6% decline, that is, if there had been no disruption, GDP would be showing a slight fall.

In the face of depressed demand, and a still weakened economy the Tories desperately need a Plan B.

Sunny adds: This is significant also because Tories expected the -0.5% figure to be quite conservative. But its worse than expected now.

Update: Ed Balls has sent out a statement saying:

These are disappointing figures which confirm that the recovery stalled and the economy contracted at the end of last year, even once the effects of the snow have been taken into account.

Of course we should always treat one quarter’s figures with caution, but it is not cautious for the Treasury to plough on regardless. George Osborne was complacent in declaring before Christmas that he had saved the economy and secured the recovery. And he is being complacent now in refusing to accept that his choice to cut too deep and too fast is holding back our economy and putting jobs at risk.

2011 should be the year when the British economy grows strongly and the recovery is secured. Yet the early signs are that the Tory-led Government’s reckless decision to abandon Labour’s plan to halve the deficit over four years has seen the economy take a turn for the worse. We now face the worst of all worlds – unemployment and inflation both rising, growth stalled and consumer confidence collapsed. And this is before the Government’s extreme fiscal tightening really starts to bite.

The Chancellor appears to be in denial. It is simply not credible for George Osborne to casually dismiss these figures once again and blame the wrong kind of snow rather than the wrong kind of economic policy. If the economy does not grow strongly this year – and make up the ground we lost at the end of 2010 – the Chancellor will have failed his first major test. He should change course before it’s too late.

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About the author
Left Outside is a regular contributor to LC. He blogs here and tweets here. From October 2010 to September 2012 he is reading for an MSc in Global History at the London School of Economics and will be one of those metropolitan elite you read so much about.
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Reader comments


1. Brian Stafford

Shank?

I guess the weather was even worse than we all remember.

The Tories will be lucky. A lot of the lost GDP in December will move to January. I recken you would have to knock 0.3 to 0.4 % off the 1st quarter GDP figures to actually see where the economy is really going.

In other words the snow took away 0.5% growth in December and we will have got 0.4% of that back in January, with a permanent loss of 0.1% due to the snow.

Anything less than 0.3% would have without the snow resulted in 2 quarters of negative growth, the definition of a recession. These are just my guesstimates.

Kevin

If anybody is looking for a shovel ready stimulus project, providing me with spelling lessons would probably be a good place to start.

The positive thing is it helps shove the monetary hawks back in their cage.

We are all in this shrinkage together. NOT.

It’s quite clear to me that the Bank of England is largely to blame. It’s their job to stabilize aggregate demand growth (ie. total nominal spending on final good and services), but they have failed to do so once again. Although nominal GDP figures haven’t been provided by the ONS, the GDP deflator figure was 2.8% higher than in 2009 Q4. If real GDP was 1.5% higher, that implies nominal GDP was only about 4.3% higher. Given 2010 Q3 NGDP figures, that means that Q4 quarter-on-quarter NGDP growth was about 0.5% – that’s an annualized rate of only 1%. It’s really not surprisingly that real GDP growth was so poor given such poor monetary policy. For a start, that is significantly below the pre-recession trend of 5.5% per annum, but the BoE should really be aiming to get NGDP to catch-up to the level if would have been had NGDP growth never fallen from its trend value, which means the growth rate should be much higher. This graph illustrates my point:

http://img263.imageshack.us/img263/310/ukngdp9610.png

The BOE did a good job keeping NGDP growth stable until about 2008 Q1, but after that they allowed it to fall off a cliff. As you can see more clearly from this next graph, we need a lot more NGDP growth to get back to the pre-recession trend:

http://img28.imageshack.us/img28/5123/ukngdp0610.png

When all is said and done, I estimate that had the BoE kept 2010 Q4 NGDP growth at its pre-recession trend of 5.5%, real GDP growth in Q4 would have been about 0.6% (2.3% annualized), which is only slightly lower than the 0.7% growth in Q3. I expect factoring in the impact of bad weather would raise Q4 growth above Q3 growth.

tl;dr: BoE is largely to blame for the poor Q4 growth.

@ inyourhouse

That is all true, inyourhouse. However, on here people think the bankers caused the NGDP plunge in 2008, because Robert Peston said so. Therefore, the narrative is the bankers caused the recession rather than it being visited on them by the 2007/08 Mervyn King monetary policy incompetence.

Correction to a bit of my previous post: “an annualized rate of only 1%” should actually be “an annualized rate of only 2%”

@Richard W: “Therefore, the narrative is the bankers caused the recession rather than it being visited on them by the 2007/08 Mervyn King monetary policy incompetence.”

Indeed. Monetary policy issues are quite hard to get across to most people, unfortunately. Blaming the banks is much easier.

@ 8 & 9

Yes, yes…. the banks were entirely blameless….really…it was nothing to do with them at all…… HAHAHAHAHAHAHAHAHAHAHAHAHAHAHA (I’ll stop now, my keyboard has started to smoke)

@Galen10: “Yes, yes…. the banks were entirely blameless….really…it was nothing to do with them at all”

Not entirely blameless, but had the BoE kept NGDP on its trend growth path, the recession would have been much milder (perhaps even non-existent). Do you dispute this?

@7

So… should we have the government back in charge of the BoE, yes? Sorry but your rambling attempt at blinding everyone with stats &c doesn’t really help.

7 Just another banker brown nose.

@Mr S. Pill: “So… should we have the government back in charge of the BoE, yes?”

No, we should change the way in which the BoE conducts monetary policy in order to make it less discretionary, more timely and quasi-automatic. “Targeting the forecast” by issuing a financial instrument (CPI futures, for example) and using its value to set the monetary base is my favoured proposal.

“Sorry but your rambling attempt at blinding everyone with stats &c doesn’t really help.”

How doesn’t it help? I think explaining that monetary policy is the major problem is very important, because people just seem to be ignoring the issue. Do you disagree?

@14

My issue is when you say:

“the GDP deflator figure was 2.8% higher than in 2009 Q4. If real GDP was 1.5% higher, that implies nominal GDP was only about 4.3% higher. Given 2010 Q3 NGDP figures, that means that Q4 quarter-on-quarter NGDP growth was about 0.5% – that’s an annualized rate of only 1%.”

I haven’t the foggiest what your on about. Some (most?) people reading this site do not have a degree in economics so using what may appear to you to be relatively normal language and concepts doesn’t translate well.

I point you to this essay (Politics & the English Language) for why simpler language is essential.

Q4? Q3? NGDP? How does a quarter-on-quarter growth at 0.5% give an annualized rate of 1%? These things need explaining if you want anyone (aside from the aforementioned economics students) to discuss with you, let alone agree.

What the banker brown nose is trying to say is that 2 years ago as the world economy was about to go tits up the BofE should have raised interests to kill inflation.

The fact that this would have sent the whole economy off the cliff does not compute with the know it all, after the event troll.

He would like to go back to the good olde days when interest rates were changed at tory party conferences so the chancellor could get a standing ovation.

@14 inyourhouse: “I think explaining that monetary policy is the major problem is very important, because people just seem to be ignoring the issue. Do you disagree?”

I’ve not noticed your contributions here before, so welcome to LC. But please understand that few of us have a degree in economics.

Richard W has been very patient in the past, clarifying some of my misunderstandings. Take your sentence: “It’s their job to stabilize aggregate demand growth (ie. total nominal spending on final good and services), but they have failed to do so once again.” For a non-economist, that needs to be qualified by *why* and *how*. The audience here is not utterly thick and can use Google to clarify things. But sometimes we need verbose explanations.

(I have deliberately written tortuous documentation on occasions. The process was simple but the consequences of misapplication were painful, so I wrote something that discouraged people from attempting implementation unless they were absolutely determined. I used jargon when vernacular would have suited and quoted all of the standards to the point of boredom. Alongside that, I was writing accessible documentation.

I’d say that I was writing for the intended audience.)

@Mr S. Pill: “I haven’t the foggiest what your on about.”

Sorry. I’m not really sure how to explain it in simpler terms, though, because I think it’s an inherently complicated subject. Basically, nominal GDP is total spending on final goods and services in the UK. Businesses set their prices and wages according to how much revenue they expect and that is a function of total spending in the economy. If nominal GDP growth is lower than expected, then average revenues will be lower than expected. If prices and wages were perfectly flexible that wouldn’t be a problem, because firms could just cut both until markets clear. But because prices and wages are sticky in the short run, there isn’t enough spending in the economy to buy all goods and services at those prevailing prices/wages. As a result, real output falls so that the market clears.

The BoE should prevent this from happening by making sure NGDP growth doesn’t fall below expectations (which, in practice, means keeping it on a stable growth path). NGDP is equal to the money supply multiplied by the velocity of money (by definition), so essentially the BoE can achieve this goal by increasing the money supply if it reacts quickly enough. The BoE’s interest rate cuts and quantitative easing have, for the most part, been too little too late unfortunately.

@sally: “What the banker brown nose is trying to say is that 2 years ago as the world economy was about to go tits up the BofE should have raised interests to kill inflation.”

No, I’m saying the opposite. The BoE should have increased money supply growth in order to prevent NGDP falling. That would have lead to inflation somewhat higher than 2%, but it should also have mitigated the fall in real GDP.

@16 sally: “What the banker brown nose is trying to say is that 2 years ago as the world economy was about to go tits up the BofE should have raised interests to kill inflation.”

The “banker brown nose” (who knows what colour shirts s/he wears?) was discussing things that happened in the last six or nine months. But I can’t tell you what s/he thinks about interest rates.

@Charlieman: “I’ve not noticed your contributions here before, so welcome to LC.”

Thanks.

“For a non-economist, that needs to be qualified by *why* and *how*.”

I think my reply to Mr S. Pill explains it quite well, but if it’s not clear enough just say and I’ll try to clarify it.

No one is saying that the banks did not behave disgracefully and there were not plenty of excesses in the banking system leading up to the crisis. However, why did problems in the banking system from late 2007 lead almost to the collapse of the whole system in late 2008? Why did kilt makers suddenly decide to stop making kilts? Why did mobile phone makers suddenly decide to rein back on making phones? Why did chip makers suddenly decide that they could no longer be bothered producing electronic components? Every last cent that was lent in sub-prime could have been lost and it should not have led to what we experienced.

Those who blame bad monetary policy by the BoE, Fed and ECB in 2008 have an explanation for what happened. Those economists who point to banker excesses do not have an explanation so scapegoating is a convenient smokescreen because they do not know. Even eighty years after the Great Depression they still argue about what caused it so do not expect any agreement soon on the Great Recession. What should have been problems in the banking system should have been kept internal to the banks and should not have been allowed to spiral out of control into a huge plunge in NGDP. The banks would still have taken losses for their excesses and bad loans. However, the plunge in NGDP exacerbated the bank losses and meant everyone had to eat them. The people who lost their jobs and the public losing their public services are eating the losses. NGDP is a nominal figure and is an illustration that nominal shocks leads to real effects.

Money was too tight in 2008, in that the demand to hold money was rising faster than the central banks were providing it. The chart @ 7 of the growth rate of NGDP is an illustration of where the economy is to where it should be. After a plunge and the economy starts to grow which it is doing regardless what the 4Q figures say. A gap opens up between the present trajectory and where NGDP would have been without any fall. It is that gap that causes people to lose their job, causes tax revenues to fall, forces a deficit on the government, causes bankruptcies, forces losses on the banking sector. The difficulty is not getting the economy growing but making up that lost NGDP. Unless the lost NGDP can be recovered firms only employ enough workers and governments cut spending to align with the new reality of NGDP. Therefore, the best solution is to not let it fall in the first place. Don’t let the economy grow too fast as that will lead to a bust, keep it on trend. If excessive credit growth is thought to be a problem well that should be regulated in the banking sector, but that is different to monetary policy. The current higher inflation helps to make up the gap but it makes us all poorer in the short-run but in the long-run it is neutral.

@ Sally you could not be more wrong about interest rates. What is being said is that the real interest rate was too high in 2008. The last thing we want is politicians manipulating them for the electoral cycle. We want an independent central bank preferably one who tells the politicians to fuck off if they try and interfere. However, we need them to do their job and they massively failed in 2007/08.


Reactions: Twitter, blogs
  1. Liberal Conspiracy

    Snow joke: UK GDP shank even more than expected at the end of last year http://bit.ly/gx9eIO

  2. Soho Politico

    UK economy shrank, even factoring out the effect of the snow. http://t.co/ZLfFpfc via @libcon

  3. Samuel Tarry

    RT @libcon: Snow joke: UK GDP shank even more than expected at the end of last year http://bit.ly/gx9eIO

  4. Mark Edward Lewis

    RT @SamTarry: RT @libcon: Snow joke: UK GDP shank even more than expected at the end of last year http://bit.ly/gx9eIO

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