The UK is in a depression

25th July 2012

As we move forwards through 2012 we see that in so many countries economic output and growth is proving to be a disappointment. Today I wish to take the opportunity of looking at my own country the UK as it produces its latest Gross Domestic Product figures for the second quarter of 2012. We do not start from a good base as the last two quarters have been negative, with the last quarter of 2011 recording -0.4% and the first quarter of 2012 recording -0.3%. So according to the definition of two quarters of falling output the UK is in recession.

Worse than that in my view is the fact that for the last two years the UK economy has trod water and gone nowhere. The problem with that is that it was supposed to be the period of recovery! If you look at past recessions you see a dip followed by a recovery often a strong one. This time we see a recovery look like it was beginning after 18 months or so but it only lasted a year and then,very unusually fizzled out. Since then we have spent two years flat-lining at a level of economic output around 4% below the previous peak. In essence this has been the rationale behind my argument that we are more in danger of a depression than a recession. When historians review this period they may conclude that the (possible) depression of the 2010s has already started.

The Official Response

We have seen a proliferation of measures recently as what became called plan A -deficit reduction accompanied by expansionary monetary policy- hit the problem that with little or no economic growth it will always struggle. If we look back to forecasts we see that if we go back to the last Labour government we were expected to be growing at 3% a year right now. So we have "lost" 6% of output compared to that in the last two years alone with the obvious implications for tax revenue and spending.

Regular readers will be aware that I am a critic of all the monetary expansion and never expected it to work. But nonetheless we are getting more of it- another £1 billion of Gilt purchases by the Bank of England today alone- as the Bank of England ploughs ahead regardless. We are also getting more and more hints that they are thinking of further base rate cuts. This seems to ignore the obvious fact that if you cut by 4.5% (from 5% to 0.5%) and it does not work what is the likelihood of another 0.25% or 0.5% working?

Actually I have been surprised that the Monetary Policy Committee hasn't reduced base rates further. The more cynical amongst you might attribute this to the fact that the Bank of England makes a theoretical profit via the fact that it charges for the money for Quantitative Easing at the base rate! So whats 0.5% of £334 billion annualised?

What are the latest numbers?

You might in the famous words of the BBC's children's programmes like to make sure you are "sitting comfortably" before you read this.

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