13th June 2012
Back on the 25th of April I wrote an article suggesting that whilst recessions may ebb and flow there was a danger that if we obsessed in the moment we might miss a longer-term trend. And if one stopped and examined the position of the UK economy in what was supposed to be the recovery period there was a danger that we were in fact mired in an economic depression. One of the issues of declaring an economic depression is that to be fully sure of one then you need to lack back on it as for example we do now with the 1930s. Unfortunately in my opinion we do not have the luxury of time to burn and we need to understand our position as best we can so that we can respond appropriately.
So where are we?
Tucked away in the latest Office for National Statistics update on UK economic growth was this sentence:
"Over the past eighteen months, the economy has experienced a mild contraction in output."
The period over which the UK economy has been on "The Road To Nowhere" has kept extending and let me add this to it. In the first quarter of 2010 our real economic output was £346.3 billion and in the first quarter of 2012 it was £351.3 billion (adjusted to 2008 benchmark) for a grand total of 1.4% of growth.
If we recall that before this period we had a sharp economic contraction then our lack of bounce back is a serious concern. Indeed if we add in the extraordinary amount of monetary stimulus the UK economy has received with official interest-rates rates reduced to what was supposed to be an "emergency" 0.5% and some £325 billion of Quantitative Easing the growth we have had seems paltry. Indeed as I type this the thought that we have had an "emergency" base rate of 0.5% since the 5th of March 2009 reinforces the depression theme. Otherwise why has an "emergency" rate persisted for so long? And of course emergency disappears into my financial lexicon for these times.
Bringing this right up to date
The latest update from the National Institute for Economic and Social Research was released yesterday afternoon:
"Our monthly estimates of GDP suggest that output grew by 0.1 per cent in the three months ending in May after declining by 0.1 per cent in the three months ending in April 2012. The UK economy has ceased to contract, but economic activity remains very weak."
So if they are right we have continued in a similar pattern in the two completed months following the first quarter of this year.
Industrial and Manufacturing Production
Again let us look back for a little perspective rather than just examining one months figures compared to the last.
"•The seasonally adjusted Index of Production fell by 1.0 per cent in April 2012 compared with April 2011
•The seasonally adjusted Index of Manufacturing fell by 0.3 per cent in April 2012 compared with April 2011"
So we have in fact done worse than be on the Road to Nowhere here and I find the manufacturing numbers particularly troubling. You see it looked for a while if we were seeing a genuine recovery there but at best it has fizzled out. And if we look at overall industrial production we see this.
"This is the 14th consecutive monthly fall on the same month a year ago"
I don't know about you but that looks like a trend to me!
If we take this further we see that if we use 2008 as out benchmark of 100 then our industrial production is now 90.1. One can make excuses such as the decline of North Sea Oil but our underlying manufacturing index is at 94.6.
If we want a five year perspective then in 2007 our industrial production registered 102.9 and our manufacturing production registered 102.7. So they have fallen by 12% and 8% respectively which I would argue are depressionary levels.
Real wages are still falling
We might have hoped that the recent recorded fall in officially measured inflation would help on this front. Unfortunately wage rises have fallen back too and at the latest recording have fallen to an annual rate of 0.6% which the ONS reminds us is.
"This is the lowest growth rate since March-May 2009"
Back to the levels of when we were suffering from a sharp economic contraction. So as we consider falling nominal wages we also find that real wages are falling at 2.4% per annum if you use the Consumer Price Index or 2.9% if you use the Retail Price Index.
So if we consider the deleveraging of personal balance sheets the concept of the UK consumer riding to our rescue seems extremely unlikely right now.
What about house prices?
This can be a measure of the UK economy so let us look at the same index I looked at last time.
"Knight Frank/Markit's House Price Sentiment Index (HPSI) indicates that average prices fell again May. A decline in home values was reported by 17% of households, while 9.5% signalled that the value of their property rose. At 46.3, the resulting HPSI figure is up from April's reading of 45.4 and just under March's 20-month high of 46.6."
As you can see house prices continue to fall if this is an accurate guide except for one part of the UK (Central London). If we compare the numbers for the last three months with the benchmark of 50 we see house prices continuing to fall.
Official and unofficial Interest Rates remain completely disconnected
This has been one of my themes since the earliest days of this blog. Let us remind ourselves that the official base rate is 0.5%. However if you look around there is already a disconnect with savings rates where a brief search online shows a cash ISA offering 3.35%.If we look at personal loans and we use a fair sized loan we see that they are at best on offer at 6% and interestingly the best rates are from the supermarkets rather than the banks. The latest average overdraft figure is 19.52% and that excludes associated costs.
That is before we get to the subject of payday lenders – is there very existence not one of the signs of the mess that we are in?- and perhaps the most famous one in the UK is Wonga which on its website tells us it has a representative interest-rate of 42
14% So just the odd 4213.5% over the base rate then.
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