GDP Up And No Double Dip Recession After All

The earlier estimate of GDP from the ONS that raised fears of a double dip recession in 2011-12 seems to have been revised and a double dip recession has been avoided according to a statistical bulletin from the ONS.

The earlier estimate of a fall in GDP growth between Q4 2011 and Q1 2012 of 0.1% has been revised to 'flat' and the worries about two consecutive quarters of negative growth have now gone.

In volume terms UK GDP increased by 0.3% between Q4 2012 and Q1 2013. The figure remains unrevised from the earlier estimation. In terms of current prices GDP seems to have increased by 0.9% for that period.

The households savings ration was at its lowest since Q1 2009 with an estimate of 4.2% in Q1 2013. Household real disposable income increased by 1.4% between 2011 and 2012, the highest since 2009.

Depression Expected To Continue For Some Time

The latest National Institute of Economic and Social Research (NIESR) estimate of GDP suggests that output fell by 0.1% in the three months to January 2011 following the 0.5% decline in the three months to December 2010. Month on month estimates suggest growth of 0.6% due to recovery from the severe weather conditions at the end of the year. The depression, to use the term the NIESR prefers to recession, is expected to continue for some time. The sector contributing most to the decline was construction with a fall of 12.2% following from a fall of 12.6% in the quarter ending last month over the previous quarter. Industry increased by 3.7%, agriculture by 1.3% and services by 0.3%. Agricultural output remained the same at 89.7 as did contruction at 95.7. Services increased output from 100.8 to 102.1.

Expansion Slowdown Expected To Continue

The slowdown in economic expansion is set to continue according to the OECD Composite Leading Indicators for May 2010. The deceleration continued into the 10th month with an increase of 0.1% point.

France, Italy, China and India seem to have reached a peak in the growth cycle and signs of a peak are emerging in Canada the UK and Brazil. Ongoing expansion is still taking place in Germany, Japan, the US and Russia but at a slower pace. The ASEAN coutries are generally gaining momentum of recovery.

Growth Could be Faster

IMF say that the recovery is taking place more quickly than expected but it is uneven. With the right co-ordination it could be faster and more even with growth of 2.5% or 30 million jobs globally.

Threats include fiscal debts in some countries, possible asset 'bubbles' in emerging economies and the danger that consolidation in some parts of the world could have effects on others.

World leaders will discuss policy options at the coming world leaders summit in Canada. Ministers have already agreed on a number of reforms following the global crisis - greater transparency, stronger capital and liquidity standards, fair and substantial contribution, supervision of hedge funds and credit rating agencies and a single set of global accounting standards.

No Change In Income Inequality

Statistics covering the years 2008/9 suggest that income inequality remained stable during that time. The focus of the analysis published by the ONS is on the effect taxes and benefits have on disposable income. For the years covered by the study income for the top quintile (top fifth) was £73,800 on average compared with £5,000 for the bottom quintile. The top fifth received 15 times more than the bottom fifth. It is slightly down on the analysis of the years 2007/8 when it was 16 times more. When the effects of taxes and benefits are taken into consideration it is a slightly different picture. The ratio between the top and bottom is 4:1 with average final incomes of £53,900 compared with £13,600. However, the redistribution of income affects households in different ways. The effects of taxes and benefits include benefits in kind, cash benefits, direct taxes and indirect taxes which may or may not affect people individually with some 'doing better' than others such as houses with children and retired households and the cash benefits and benefits in kind like health and education.

The inequality of income can be measured by the Gini Coefficient which expresses, as a percentage, the extent of inequality where higher values indicate higher inequality. In 2008/9 the Gini Coefficient for UK was 34% for all UK households. Over the past few decades the Gini Coefficient has increased a lot from 28% in 1983 to 34 in 2008/9. It has remained almost unchanged since 2005/6. In retired households it has fallen slightly from 27 to 26%. Changes in inequality can be related to changes in the overall economy with the Gini Coefficient rising and falling during periods of growth and recession and households at the top benefiting more from growth in incomes and investments while others tend to remain stable.

OECD Points To An Expansion Slowdown

The Composite Leading Indicators from the OECD for March 2010 suggest that where the economic expansion has been taking place there may be a slowdown in the pace. Most of the signs of expansion and recovery say the OECD have been tentative but in France and Italy the signs are stronger. There is also a possibility that expansion may also be slowing in Brazil and China.

The CLI indicator for the OECD area as a whole was 0.6 points up in March 2010 with the US increasing by 0.8 and Japan by 0.9 points. The euro area increased by 0.5. Brazil and China both decreased by 0.3 points indicating the possible halt to expansion in China and to recovery in Brazil. India and Russia increased slightly by 0.3 and 0.6 points respectively.

OECD Economies Continue Expanding

The Composite Leading Indicators (CLI) for January released today (5 March 2010) from the OECD seem to show that the economic recovery and expansion that has been taking place in the OECD economies is continuing. The improvement in economic activity in the G7 is only marginally better than that for December.

The index for the OECD area increased by 0.8 points in January 2010, 11.3 points higher than January last year. The increase was evenly distributed between the 'Triads', the US, 11 points, the Euro area up 12.5 points and Japan 10.7 points. The statistics show that all G7 economies are in an expansion phase but Brazil and India and in a recovery phase, even though the 5 major Asian economies combined are expanding.

Trade Volumes Grow In G7

Exports from G7 countries grew 5% quarter-on-quarter in Q3 2009 and imports were also up by 4.1%. On a year-on-year basis exports were still significantly lower, down 17.5% as were imports, down 14.6% on last year.

The value of goods and services in OECD countries rose in Q3 2009. Exports were up by 7.8%, Q-on-Q and imports by 8.7%. On a Y-on-Y basis growth this year is again still very negative with exports down 22.1% and imports 24.7% but the overall trend suggests a bottoming out and turning point.

Monthly merchandise trade values seem to confirm the recovery. Total merchandise trade values in G7 countries have been increasing since April 2009 but remains below the levels reached during August 2008.

UK Officially Out Of Recession

The latest GDP preliminary estimates show that Britain is officially out of recession. According to the ONS, GDP increased by 0.1% in the fourth qaurter of 2009. The index increased from 100.6 to 100.7 (100=2005). It means the recession is over, recovery has begun and if it can be maintained we can look towards growth. The increase is mainly due to the distribution, hotels and restaurants category with an increase of 0.4% and govermnent services with an increase of 0.2%. Output in both the production and the service industries increased by 0.1%. Between Q4 2008 and Q4 2009 GDP decreased by 3.2%.

These preliminary GDP estimates may be revised upward or downward during the next few weeks until the end of February when the Output, Input and Expenditure (OIE) estimates are published. The full set will be published in the Quarterly National Accounts in April.

IMF World Economic Outlook October Report

Economic growth has turned positive after the deep global recession, according to the IMF's World Economic Outlook for October 2009. The main factors were wide ranging and unprecedented public interventions supporting demand and lowering uncertainty and risk in financial markets. They expect the recovery will be slow and subdued. Activity remains well below pre-crisis levels. Manufacturing and a turn in the inventory cycle are leading the recovery. Retail stability is returning and consumer confidence is growing. Looking beyond 2010 sustainable growth will depend on addressing the supply disruptions caused by the crisis and rebalancing global demand.

In the meantime, policies will have to remain focused on restoring financial health and maintaining supportive macro-economic policies until conditions improve still more. Policy makers should prepare to reduce the level of public intervention. They will have to map a course between reducing public interventions to early, risking the progress made so far, or leaving them in place too long, distorting incentives and public balance sheets. Emerging and developing economies are further ahead in the recovery due to the successes of some Asian markets. Eastern European emerging economies have been among the hardest hit and their recovery may be slower.

Manufacturing Expected To Continue Falling But More Slowly

The CBI industrial trends monthly survey suggests that some manufacturers expect the volume of output to increase in the next few months but even more expect it to fall. Overall the decline in output is expected to slow quite a lot over the next quarter. The survey results show an improvement on the last survey and the level is back to where it was last September before the collapse of leading US bank Lehman Brothers.

Demand for UK made goods is weak with order books still below normal. Exports were also low even though the pound is relatively weak at the moment. Prices are expected to fall. Stock levels remain more than adequate to meet demand even though firms have been letting them run down. The practice of running down stocks is expected to continue. Many managers seem to believe the worst of the recession is over.

Bank Maintains Interest Rates At 0.5%

The Bank of England's Monetary Policy Committee decided at their meeting on 7 May 2009 that the bank rate will stay at 0.5% on commercial bank reserves. The MPC also decided to increase the size of its asset purchase programme by £50 billion to £125 billion. The world economy remains in deep recession, global output has contracted and international trade has fallen. The increase in private saving, the restructuring of balance sheets by banks and weaker global demand will continue to hold back economic activity. Another factor acting in the other direction is the stimulus given by governments around the world to improve the availability of credit by easing in monetary and fiscal policies. It was decided that as the stimulus is expected to eventually lead to a recovery in economic growth and inflation to return to the 2% target, the interest rate should remain at 0.5% and also to continue with the programme of asset purchases financed by the issuance of central bank reserves and increase its size to £125 billion.

Manufacturing Recession Improvement

The Chartered Institute of Purchasing and Supply (CIPS) has recently reported that the manufacturing sector is still in recession but the figures for the month of April show a marked improvement in terms of output and new orders. The Purchasing Managers Index (PMI) for April was 42.9 from 39.1 in March. Employment, inventories and output prices fell at record pace. The biggest cuts in employment were by the larger companies but overall a third reported job losses. The PMI is moving away from its February record low.

(The Chartered Institute of Purchasing and Supply PMI Survey indicates 50%=neutral and below 50% means a contraction)

Noah's Ark

The Government is steering the ship. It has instruments of control to direct the economy in a particular direction. The most important instruments include public spending and taxation decisions to alter the course of the economy. Economic indicators tell us how well a policy is working. Budgetary instruments of control are used to vary the amount of public spending to increase or depress economic activity and to target its spending to try to influence groups or areas.

Earlier administrations have denied that government could control the economy in this way. The most they could do, they said, was create the right free market conditions and competition would do the rest. Governments still do try to steer the economy. It tries to control inflation as all post-war governments have done. The recent recession and government financial support for the banks show that free markets are far from perfect and government intervention is occasionally necessary (Jones et al. 1998).

At the centre of the machine are the Treasury and the Bank of England. There is considerable argument about the extent of their power but they have an important ongoing role in daily strategy and tactics in fiscal and monetary policy (Jones et al. 1998). The Chancellor of the Exchequer has initiated several policy actions in recent months to help cope with the credit crisis, stabilize the economy, control inflation and control unemployment. Macroeconomic objectives also include long-term sustainable economic growth. The Governor of the Bank of England has also used its policy tools to carry out its functions and achieve its objectives (Parkin, Powell and Matthews, 1997).

Recessions begin when investment slows down. If investment is maintained at a modest rate, capital stock grows slowly and the law of diminishing returns works in reverse. Real business cycle theory takes changes in investment demand and demand for labour into consideration. People can decide when to work and how much but must use the real interest rate. If the quantity of money changes, aggregate demand changes. The 'dismal science' says that however much investment and technological change occurs real wage rates are always being pushed back down to subsistence levels. It is the theory on which classical population growth economics is based. The classical growth theory is likewise based on the view that population growth is determined by income levels. Modern growth theories turn the classical theory on its head.

According to the modern growth theory founded by Joseph Schumpeter new technologies are the source of economic progress. In capitalist society it creates turmoil, a process of 'creative destruction' creating new businesses and destroying currently profitable businesses. Rising incomes slow population growth because they increase the opportunity cost of having children. Growth occurs because the technological advancement and productivity growth prospects are unlimited.

Miscalculations of inflation may give an inaccurate measurement of real GDP growth. They probably give a fairly accurate estimation of the phase of the business cycle. Other indicators, such as jobs, correlate. Real GDP figures can overstate the situation because in a recession household production and leisure time are countercyclical and tend to increase. They also tend to understate to long-term growth rate. Impulses will come from future expectations of sales and profits on one hand and an increase in money supply on the other. An unanticipated change in aggregate demand due to fiscal or monetary policy may also bring a change in real GDP (Parkin, Powell and Matthews, 1997). The banks must get things moving again. Economic policy is made up in the process of execution and relies on private bodies like banks. The economy cannot work without banks circulating notes and coins, processing cheques and acting as financial intermediaries to businesses (Jones et al, 1998).

This Way To The Trough

Economics analysts try to understand the economic world and then devise policies to try to improve it. Economic policy makers try to predict the outcome of alternative economic policies and evaluate them on a scale of better to worse by stating policy objectives and analysing policy outcomes according to political sentiments. An objective and scientific evaluation can be made of economic policy objectives such as efficiency, stability, growth and equity. Economic growth, in terms of incomes and productivity, is one of the main objectives of economic policy. Even in times of recession, economic performance is measured as a decrease in real GDP, or negative economic growth.

Growth transforms poor societies into rich ones but it has costs. The costs of growth are that in doing so it uses up exhaustible natural resources and might damage the environment. Two key factors that influence growth are technological advancement and capital accumulation. Devoting resources to one thing means they are not being devoted to anything else. There is always an opportunity cost. If resources are being used to discover new technologies and new forms of capital, they cannot be used to increase consumption goods and services or on current environmental concerns.

Growth can be measured in terms of the increase in real GDP. The periodic but irregular movement of economic activity we call the business cycle measures fluctuations of real GDP around potential GDP, the real GDP that could be produced if resources were fully employed. The economy has officially entered a recession and will eventually reach a 'trough' or turning point at which it will enter another phase of expansion. It is considered severe at the moment but is not expected to be as severe as a depression. Recessions are unpredictable as are animal spirits. One of the government's problems is closing the recessionary gap (Parkin, Powell and Matthews, 1997).

The current recession could be said to have global proportions. Globalisation means that process by which the production and marketing of products is becoming more integrated and interdependent (Harrison, Dalkiran and Elsey, 2000). As a result of this global economic interdependence the effects of the 'credit crisis' are being felt all over the world. The problem for the international institutions is that there is no model in finance, economics or international business theory that can explain or predict capital flows. The international institutions themselves may be out of date for the problems of the global environment. GATT has been replaced by WTO. The IMF was designed for a system that no longer exists. Internationally agreed policies may be required to curb the trend toward greater deregulation and international financial anarchy (Dawes, 1995).

Growth and population are often related. Rapid economic growth may be linked to rapid population growth. Real GDP per person is a measure of real GDP divided by population and can be used to compare growth rates across countries and over time. There may be similar features in productivity growth figures, business cycles and long-term trends in potential GDP in countries like the major OECD countries.

Long-term economic growth means expanded consumption possibilities, a better environment, pensions, welfare and more support for the poor and disadvantaged. When the rate slows the opposite effects and losses are felt. There is a relationship between the long-term growth rate and welfare and usually a trade-off between spending on welfare and on the productive sectors of the economy that generate growth. One of the biggest problems of macroeconomics is finding a balance of resource allocation between the two rival claims (Parkin, Powell and Matthews, 1997).

The scarcity of resources means that a frontier exists between what is attainable and unattainable in terms of production possibilities. Inward shifts along the frontier reduce our production possibilities and outward shifts expand the possibilities and resources are decreased and increased. Firms reduce production and prices for short-run equilibrium to eventually restore long-run equilibrium or they wouldn't be able to sell their products and customers buy what they need. Consumers may in fact be worried about their incomes and cut spending which would in turn leads to job losses, falling investment and a deepening of the recession. Consumer efficiency occurs when utility cannot be increased by reallocating their budgets. They should budget as wisely as ever for utility, preferences, indifference, substitutes and prices they can afford.

We can only continue to analyse the economic world, gain a greater understanding of how it works and devise institutions to that might improve economic performance. One thing is pretty sure, all the questions and answers will arise from scarcity (Parkin, Powell and Matthews, 1997).