12 Apr 2012

Official: since the spending review, a shrinking economy (just).

I’ve spent the day buried in spreadsheets and statistics looking at insights for our Channel 4 Jobs Report. In the course of that I got a closer look at the GDP numbers released as part of the Quarterly National Accounts a fortnight ago.

I was in Spain at the time, but still managed to show that Britain’s economy hasn’t grown since Q3 2010. Zero growth in five quarters since around the time of the government’s spending review, in a period when, for context, the coalition’s original (June 2010) deficit reduction plan assumed a whopping 3 per cent points of growth.  Zero vs 3 was not very good.

Well, how about this as part of my day of spreadsheet-mania? It appears that not only was the economy not bigger, it was actually officially smaller. Over 15 months the official measure shows quarterly GDP is £132m smaller or -0.04 per cent. It rounds up to zero at one decimal point, but it is undeniably negative. It is the official measure of GDP, known as ABMI, or gross domestic product at market prices (chained), and in Q3 2010 it was £352,552m, and in the latest quarter, Q4 2011 it was £352,420m.

All this data is from the supplementary tables C2 on the byzantine ONS website. It’s on a tab in this Excel spreadsheet.

It’s plausible that in judging the economic performance of the coalition,  you give them Q2 2010 too. In that case, since the chancellor walked into Number 11, the economy has grown 0.6 per cent (0.64 oer cent precisely) in the six quarters since the coalition won the election. For context, the OBR forecast we should have seen 3.6 per cent growth during that time when the deficit reduction plan was launched in June 2010. So a rather different state of the world.

But the spreadsheet fun does not stop there. Table C2 breaks down the contributions to these GDP levels. It gives a pretty clear picture of what is going wrong in the UK economy. Almost all the weakness over that period has been in the domestic economy. Here I must credit my producer Neil Macdonald.

The domestic sector of the economy has shrunk by 0.8 per cent under the coalition (0.76 per cent precisely over six quarters, since Q2 2010) but this is NOT driven by cuts in government spending. It is generalised weakness in the UK domestic economy.

What has undoubtedly saved the day and left the economy growing, just about, has been the performance and net trade, where strong exports have been up 5.47 per cent, more than making up for a strong rise in imports of 2.95 per cent. Significantly the exports measure jumped by about £1.5bn in Q4 2011, the peak of the euro crisis. Given that, it does seem difficult to blame our current malaise on the international economy. Perhaps you could argue that the rapid export growth would have been even higher.

And this is where it gets a little strange. The 0.64 per cent growth that we have seen in Britain since the coalition came to power corresponds to an increase in the level of GDP of £2.246bn between Q2 2010 and Q4 2011. Now have a look at the column below I have highlighted in red. That goes from subtracting £1.4bn (“-1 388”) from Q2 2010 GDP, to adding £1.2bn to Q4 2011 (“1 186”). That’s a swing of £2.574bn. Effectively it adds £2.574bn to GDP since the coalition came to power. What is this mighty new growth industry contributing to our economy, you might ask? It is something called “statistical discrepancy”. And without it the UK economy would be smaller now than the coalition inheritance.

What does this prove? Not that we are in a secret recession. But that the economy is totally flat and has possibly got a little smaller since the spending review, and that it might not have grown (even the tiny amount it has) and instead shrank a little under the coalition without the help of a statistical discrepancy. There’s undoubtedly a deep-cover technical explanation for this, but let’s just say the economy is pretty flat.

What does it say about the deficit denial versus growth denial debate? Well the Adam Smith Institute responded to my earlier calculation of zero growth by saying it showed the case for more cuts. Clearly those on the left might argue the cuts have gone too far. Well, we haven’t really had the cuts so far, which suggests the drag on growth will remain. At a guess the VAT rise is looking like a possible culprit. Both left and right might find a way to agree with that, though not the Government.

Now hopefully all this will stop when the Q1 numbers emerge in a fortnight. I have been far more positive on them than, for example the OECD, which predicted they will show the UK in recession. However Alan Clarke, UK economist at Scotiabank, points to a potential horror story from tomorrow’s UK construction output data, that might even suggest that Q1 will be negative, confirming a recession. Friday 13th, it is.

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9 reader comments

  1. Andrew Dundas says:

    It now looks as if the VAT cut from 17.5% to 15% from November 2008 really, really was a saving boost for the UK economy. And in the face of the international credit crisis following the bankruptcy of Lehman Bros and the AIG bail-out.
    That VAT cut – and the benefits boost that followed – probably stabilised consumer spending when it might have collapsed in winter 2009.
    By keeping spending and tax revenues up following the Wall St crash, did the UK increase or decrease the current deficit? If they did, then maybe our government’s and the ‘Merkozy’ approach are both ruinous? Time will tell.

  2. Charles Jurcich says:

    The reason for flat growth is that the government refuse to fill the output gap – doing so is what counter-cyclical fiscal policy is all about. Even using the OBR’s estimate for the gap at 2.8%GDP – filling it with targeted stimulus would still be enough to bring unemployment down – at least to some extent.

    I believe they need to spend another 3.5%GDP.

    1. Zakia says:

      Benji, “fossilized dung” would imply that federal agecines are inert and non-aspirational. What they really are, instead, is a form of parasitic rot, like necrotizing fasciitis. The difference being that flesh-eating bacteria eventually run out of flesh to eat, while our benevolent government metastasizes into all aspects of our lives, incrementally wearing down our collective economic health.Juandos, in the long term, Prof. Perry will be correct. What’s the (by now) old saying? “He’s called 13 of the last two recoveries.” He and Roubini are of the same cloth…just different ends of the bolt. I don’t come here daily to get a jolt of pessimism, but eternal optimism in the face of wealth-destroying policies promulgated by Obama and his minions is irresponsible. We’re never going to see the projected growth while we have regulatory uncertainties of the scale that we now have in the US. Magical thinking won’t change that.

  3. Charles Jurcich says:

    “The domestic sector of the economy has shrunk by 0.8 per cent under the coalition (0.76 per cent precisely over six quarters, since Q2 2010) but this is NOT driven by cuts in government spending.”

    I could be wrong about this but, table C2 shows a slight reduction in gross fixed capital formation between 2010 and 2011, but I think this number includes both private investment and public investment. I’m fairly certain that the government cut its investment quite a bit, therefore this change may actually have got bigger if those cuts had not taken place.

    Might be wrong though – I can’t remember the relevant numbers.

    Kind Regards

    1. Charles Jurcich says:

      I was right, if you look at tab ‘F GFCF’ where it shows the break-down of gross fixed capital formation, you will see that the government reduced investment by £3.4Bn in 2011 compared to 2010, and this offset the increase government consumption shown in tab ‘C2’ by a very wide margin.

      Kind Regards

  4. Philip says:

    The Government is essentially winging it on the hope that the US & BRICS economies will expand sufficiently to get the world economy moving. If that doesn’t happen it seems to me we’re locked into a slow-moving downwards spiral of dogmatic classical economic spending cuts (cf 1930s). The irony is that we could expand infrastructure spending and spending on the training in skills that the UK workforce so desperately needs and, if the ratings agencies of this world downgrade us, we do what we have the freedom to do – allow Sterling to depreciate.

  5. tabitha sims says:

    very interesting. thank you for posting.

  6. Saltaire Sam says:

    So, have I got this right? With the banks in freefall and financial institutions rocking, the labour government’s policies brought about growth.

    Since that genius George Osborne came to power that has declined to virtually nothing.

    And at the same time as he (sorry the Independent forecasters) got that so wrong, he is also borrowing more than he said he would to cover the extra unemployment costs and loss of taxation from lost jobs, many sacked as a direct result of Osborne’s public sector cuts.

    But, of course, that will now all change because he has reduced the amount of tax he is taking from the top earners, who will invest in the economy even though Osborne claims he is taking five times as much in other ways.

    And anyway, there is always the big society and charities, who will fill the gap thanks to big doners.

    And we may be able to sell a lot of arms to some country that, no doubt, we will be invading in a few years’ time.


  7. Maja says:

    Benjamin needs a new word to make himself feel that he soduns like he knows what he’s talking about, since “coprolitic” and the permutations that he frequently drops here have become trite.Ad hominems aside, I’ve been reading this blog for many years and the perma-bull focus is also trite. We could be in a full-blown economic meltdown and Prof. Perry would yet be trumpeting how peachy keen things are looking. There comes a time to acknowledge the forest, even if all that you can see is a tree. Now’s that time. If, like the IMF, you see rainbows and unicorns in our future, you have blinders on and are in denial.Any recovery that we might be (or might not be) seeing is an illusion.

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