January 25, 2012
UK: Into Recession
So much for expansionary fiscal contraction in the UK. Not that that’s a surprise.
The UK Office of National Statistics has just released preliminary estimates for real GDP growth in 2011Q4. The 0.8% contraction (q/q SAAR) was large than consensus , and in fact larger than the 0.6% decline forecasted by Deutsche Bank on 1/18. Figure 1 illustrates the fact that a year and a half after the election of a coalition government bent on a path of austerity, the UK economy is likely to be entering a new recession (not that growth was so great even before the dip).
Figure 1: Annualized q/q growth rate of real UK GDP (blue), preliminary figure for 2011Q4; and Deutsche Bank forecast (red). Source: UK ONS, and Deutsche Bank, Global Economic Perspectives, 18 Jan 2012.
In my view, this is pretty much the nail in the coffin that an expansionary fiscal contraction will occur, even in a relatively small, open economy with a flexible exchange rate (see JEC/Republicans for an exposition, and this post for a critique).
Simon Wren-Lewis at Mainly Macro provides additional commentary, which I think advocates of austerity in the US would do well to heed:
The first estimate of UK growth in the last quarter of 2011 was negative. As these updated NIESR charts show, no other UK recovery has stalled in this way. Of course very little is ever certain, but we can be pretty sure that growth would have been significantly better if the current government had not imposed severe additional austerity measures beginning in 2010. (This is the counterfactual that matters, and just looking at GDP components can be a misleading way at getting at this for reasons I discussed here.) Of course growth might have been better too if the Euro crisis had not happened, but this government had no control over the Euro crisis, while it does decide fiscal policy.
I do not have anything very new to say about this, in part because many people predicted growth would be harmed before the policy was introduced. (See, for example, this letter from 80 economists published during the 2010 election campaign.) What was the reason for this major macroeconomic policy error? For some I think it was a political calculation that it would be advantageous to get as much of the cuts out of the way early, well before the next general election. However I think others in the coalition were genuinely spooked by events in Greece and elsewhere. Unfortunately the key difference between economies in the Eurozone and those with their own central bank was not appreciated. Today the claim that if these additional austerity measures had not been introduced UK interest rates on debt would have suffered the same fate as many Eurozone countries looks pretty implausible. In Denmark we even have an example of a country that has recently undertaken stimulus measures, and where interest rates have continued to fall in line with other countries outside the Eurozone (see David Blanchflower here).
So I believe we must add 2010 to a list of major macroeconomic policy errors made in the UK since the war. Like the failed monetarist experiment in the early 1980s, it is the result of a government adopting a policy which relied on a mistaken macroeconomic analysis that was not supported by the majority of academic opinion. And like that earlier failure, it will leave unemployment significantly higher than it need to have been for many years.
So, time for those in the US calling for an end to the payroll tax reduction, the reduction in food stamp programs, and cessation of stimulative monetary policies, to read a macroeconomics textbook. I suggest Greg Mankiw’s.
Posted by Menzie Chinn at January 25, 2012 06:51 PMdigg this | reddit
Professor Chinn, you're priceless.
You suggest Greg Mankiw's textbook? Larry Summers wrote in his December 15, 2008 memo to President Obama:
"Greg Mankiw is the only economist we have consulted with who refused to name a number and was generally skeptical about stimulus."
Posted by: mp at January 26, 2012 12:24 AM
I should have written "President-elect" Obama.
Posted by: mp at January 26, 2012 12:27 AM
They can't hit the target. They have been trying to raise their target since Cameron took over and they can't. Monetary policy is truly helpless no matter what Friedman said. I doubt they foresaw losses so large, it to much of the financial sphere insolvent.
A lesson both ways for the US: Much heavier public investment and a less active central bank reacting to the government and market only.
Posted by: The Rage at January 26, 2012 02:31 AM
i think an even more interesting though hard to answer question (since it involves a counter-factual) would be to ask what the UK gained in return vis-a-vis it's debt-GDP trajectory. The other counter-factual would be the potential path of gilt yields in the absence of austerity. You have to be singularly delusional and incredibly political to believe in expansionary fiscal contraction but the other two trade offs are worth a serious discussion. I, obviiously, don't have the answers.
Posted by: Gyan at January 26, 2012 02:50 AM
Insula fericles (193 211 AC)
"After transforming the universe in real estates slums.They placed God at the top, in the attics and raised towards the sky as many floors that can be numbered in the Fericula building in Rome."
Tertullien born in Carthage between 150 and 160 AC
Where is the argument the bonds yields ,the ability to repay the public or private debts, governments that have better track records in investment and in public expenditures than the private sectors.A debt perimeter that is homogeneous,that is few countries record the public support in the public accounts and some as an investment (UK investment in the financial sector).
Let us start with the current accounts they are worsening for most of the advanced economies as they worsen the public yields are tumbling down,except for some exemplary culprits.Not to question the impact of the security agencies, as they downgrade the yield goes the same path, down.
IMF WOrld bank
SDDS/QEDS Cross-Country Tables (Table C1 Gross external position)
Debts do not matter for the yields (BIS statistics,OCC)
Private debts are not factored in the analysis,noticeable that countries like Denmark,Netherland may have better public accounts but the burden left intact on the private sectors.Denmark carries the highest private debts/GDP after the Netherlands and Ireland (Please see P15).The private sector may have been drawn out beyond reasonable limits when the public sector has spared fiscal capacity.
Government through public accounts are better spenders than the private sector.
Federal Government: Current Expenditures (FGEXPND)
Please note this curve s slope to be the definition of most of the advanced economies government expenditures.One may hastily conclude debts are not be repaid giving to A. Hamilton statement "Debts are a national treasure" the needed irony.
Posted by: ppcm at January 26, 2012 05:06 AM
history shows when Europe and the UK head towards recession the US follows.
Posted by: Josh at January 26, 2012 06:05 AM
We are in a sovereign debt crisis and credit ratings are becoming much more important. England was off course with too much debt and huge deficits. Growth from debt is not sustainable unless you are reckless enough to risk 10% long rates. The central bank must maintain credibility in regards the currency. Unlimited printing is not the answer. The currency will eventually control market interest rates, not the central bank. The central bank adds some flexibility but cannot stop the credit rating agencies from recognizing reckless fiscal policy. Austerity was England's only answer. Growth from government deficits is not real growth. Reckless Keynesian policies are the problem. Europe, the United States and Japan are off track and much of the growth of the last 25 years has come from debt; it is not sustainable.
Posted by: Sinclair at January 26, 2012 07:02 AM
I usually don't comment much here because I am not an expert so I leave the analysis to others. But lately some of the commenters have been just plain wrong.
Josh - really? I thought it was the opposite.
Posted by: random worker at January 26, 2012 07:50 AM
On UK austerity we totally agreed. I have made a point of saying that the Republicans would do well to watch the failure of the UK experiment. The new UK government failed miserably because they struck their economy with a double hit. First they reduced government spending without allowing the private sector to fulfill the needs of those who would be harmed, then they raised taxes, VAT from 17.5% to 20%, just making it that much more difficult for the private sector to provide for the consumers. Economic decline was inevitable.
But that in no way proves that monetary stimulus is any better. President Bush and Obama have proven that stimulus does not work, not to mention Hoover's insanity.
What I don't understand is why so many economists ignore the solution that has worked: stable money combined with lower tax and regulatory burdens. Rather than strap the people with conditions of austerity, regulation, and taxation the solution is to release the private sector to do what it does best, provide the goods and services demanded by consumers. Simple economically, but almost impossible politically.
Posted by: Ricardo at January 26, 2012 07:57 AM
Bloombery on shale oil impact in North Dakota. It speaks to a number of Jim's points on both natural resources development and the preferability of transport by pipeline to the extent possible.
Posted by: Steven Kopits at January 26, 2012 08:06 AM
Hi Menzie, QE3 is coming !
Or as CR says :
"Although the FOMC might still wait until one of the two day meetings in April or June, the likelihood of QE3 being announced at the March 13th meeting has increased significantly."
Thanks Ben, for the stock market drive. I knew I can count on you.
Posted by: Johannes at January 26, 2012 09:28 AM
As it happens, preliminary GDP releases in the UK are less reliable than those in the US in the sense that the revisions tend to be larger in size. You might then wonder, "Given an 0.8% qq SAAR preliminary estimates of growth, what are the odds that the "final" estimate will be less than 0?"
Actually, the UK ONS makes all this data available to 1997. In that time, revisions to q/q growth rates have a std dev of 0.5%. That means that a preliminary estimate of -0.2% q/q could turn out to be positive or negative once revised. One previous estimate of -0.4% was later revised to a positive value while another estimate of 0.4% was later revised to a negative value.
On the other hand, that -0.2% preliminary estimate is 7th lowest since 1997Q1 (and the other six have all been since 2008Q1.) If you were looking for evidence of stimulative fiscal contraction, this ain't it.
Posted by: Simon van Norden at January 26, 2012 10:59 AM
After the 2008 collapse, it is difficult to call the projected fluctuations around zero growth either growth or decline... more likely noise.
As you know from simple math, a 13% decline followed by a 13% increase doesn't get you back to where you started. Do that enough times and you're in real trouble. The chatter pattern for the last year says no growth... but no real decline. Now, if that goes on for a protracted period, that's stagnation. But if it allows some financial house cleaning and policy adjustments which get rid of dead weight and obstructionism, things could get better. Of course, that depends on some real changes occurring.
It may not be perfectly analogous to personal finance, but if I keep spending more than I have and keep borrowing to keep my spending going, I better have a rich relative who loves me.
Posted by: Bruce Hall at January 26, 2012 04:47 PM
mp: The reason I noted Mankiw's textbook is that (1) it's a good textbook, and (2) despite the differences in policy recommendations from the respective authors, the content of the major macroeconomics textbooks are remarkably similar, across Blanchard, Mankiw, Hall and John Taylor (now Hall and Papell), and so forth.
Sinclair: Given Simon Wren-Lewis's recounting of sovereign borrowing rates, I wonder if the debt constraint was so binding. But even accepting what you say is true, there are different ways to hit a given deficit; one way is to opt for more revenue increases versus spending cuts.
Simon van Norden: Thanks for reminding us that one observation (especially a preliminary one) does not necessairly make a trend. But given European macro trends, and forward looking indicators, I'm guessing (like you) the UK is pretty definitely running into a slowdown of some sort.
Posted by: Menzie Chinn at January 27, 2012 01:03 PM
Unless you think that the economy has been permanently damaged (unlike all previous recessions including the Great Depression), there's no case for austerity. It's a short sighted response to temporary conditions, which ironically claims to be far sighted.
Posted by: Max at January 28, 2012 03:18 PM