UK GDP grows – Pessimism prevails

3rd November 2011

The figures have been greeted with near universal predictions of further pain for the UK economy; higher unemployment, weak manufacturing and sliding consumer spending. But – bearing in mind that the consensus is usually wrong – is it worth asking whether gloom has now become consensual?

Pessimism across the board

Of course, some pessimism would be expected from opposition politicians, but there is this from the Guardian:

"The eurozone crisis risks hastening Britain's drop back into recession, economists warned after the latest growth figures confirmed the UK was battling through the rockiest recovery since the Great Depression."

Every economist interviewed here in the FT and similarly in the Telegraph believe there is no cheer in the numbers either.

The comments of Brendan Barber, TUC General Secretary are typical of the prevailing mood:

"This was meant to be the quarter when the UK economy started bouncing back, but that hasn't happened. You have to go back nearly a century to find a slower recovery from a crash. What's worse is that this is economic self-harm. The government's deep austerity programme has choked off what was always going to be a slow and difficult recovery. No doubt ministers will try and blame the Eurozone crisis, but these figures date from before the recent difficulties."

Manufacturing Sector

Schroders' European Economist Azad Zangana says that the real worry is the manufacturing sector:

"Although an increase, this latest UK GDP number is by no means a signal that recessionary fears have abated. Indeed, this could be the strongest GDP number we see for a few quarters as leading indicators are pointing towards a meaningful slowdown. The Manufacturing PMI released this morning by Markit fell very sharply from 50.8 in September to 47.4 in October (50 is the neutral point between expansion and contraction) – the weakest level since June 2009."

"While we are not forecasting a recession in the UK in the near-term, the risks are escalating as the European debt crisis appears to have taken a nasty turn."

Services Sector: A reason to be optimistic?

Certainly the weak manufacturing sector is a cause for concern. But the growth figures were driven by a 0.7% rise in the services sector with particular strength in the transport, storage and communications industries. The services sector accounts for around three-quarters of the UK economy. If the largest part of the economy is doing well, is that not cause for some optimism?

Certainly johndeed on the Telegraph site thinks that economists reaction has been overly gloomy: "I have never seen or heard so many pessimists in the UK….By the end of today this bit of positive news will have turned into, ‘Britain slumps into recession', ‘5 million people lost their jobs today'. No wonder the Aussies call us whingeing poms, I'm starting to think they are right."

The Government has put a positive spin on the figures, but that is only to be expected.

25 thoughts on “UK GDP grows – Pessimism prevails”

  1. The_forbin_project says:

    so far as the real wages in the UK , please note that the rise has been in the Boss’s income not the working or middle classes  – who actually but most things and therefore contribute to GDP/GNP.

    the rich are getting richer , Shaun, and  theres where the the “growth” is !

    So how do we fix this?   no there’s going to be no growth  thats not on the cards – so can we fix this ?  

    all 0.1-3 %  growth  is not growth really  – is it?

    Forbin

    1. The_forbin_project says:

       replying to myself – well I found this whilst googling  some other work related stuff

      Spain and the Euro zone come to mind –

      Stages of Collapse
      Stage 1: Financial collapse. Faith in “business as usual” is lost.
      The future is no longer assumed resemble the past in any way that allows
      risk to be assessed and financial assets to be guaranteed. Financial
      institutions become insolvent; savings are wiped out, and access to
      capital is lost.
      Stage 2: Commercial collapse. Faith that “the market shall provide”
      is lost. Money is devalued and/or becomes scarce, commodities are
      hoarded, import and retail chains break down, and widespread shortages
      of survival necessities become the norm.
      Stage 3: Political collapse. Faith that “the government will
      take care of you” is lost. As official attempts to mitigate widespread
      loss of access to commercial sources of survival necessities fail to
      make a difference, the political establishment loses legitimacy and
      relevance…

      ~ Dmitry Orlov I dont think we’re at stage 3 yet………..

    2. Anonymous says:

      Hi forbin

      You raise a good point about how much of the income growth we have seen is at the upper end.  The report today only specifies by industry so we get only a little insight as the highest paid group (£601 per week) in business and finance actually saw their income fall by 1.5% in the last month. But we get no breakdown of this.

      As time goes by I suspect that thoughts will turn to how much real growth we had in the run-up to the credit crunch as well as it consequences….

  2. JW says:

    Hi Shaun
    ‘Unless you think that we will be in this mess for thirty years’
    Part of your response to my comment yesterday.
    Zombie banks, zombie households, zombie nations.
    ‘Turning Japanese, yes I think so’; coincidentally just over 30 years old performed by the Vapors (disease), an archaic term for certain mental and/or physical illnesses.
    Life copying art?

    1. Anonymous says:

      Hi JW

      The more I think of that thirty year timescale the more it troubles me…

      On the happier side were the Vapo(u)rs prescient in their lyrics? In some ways yes and as I remember it well and am humming it as I type, it is also ageing in a way.It is a good way of representing the 30 years of Jonathan Portes plan and if you can come up with as good a way for representing forever then you will be doing well…. :)

  3. Anonymous says:

    Hi Shaun,
    Thanks for inserting the SME credit report. I hope it becomes a permanent feature of your daily output. Congratulations on your Twitter following, of which I am one. Oxford Economics point out that SME access to finance in the Eurozone worsened considerably between Oct 2011 – Mar 2012. SMEs account for 60% of European GDP and two thirds of overall employment. I believe that when we look back at the policy responses during this crisis we will conclude that allowing SME finance to go to the wind was one of the worst errors. The mistake compounds itself when I hear Hollande talking about ‘growth’ as if it is conjured by governments.

    1. DaveInSpain says:

       During Hollande’s inaugural speech I reached for the remote control just after he uttered the words “Europe needs a project”…

      1. Anonymous says:

        Wasn’t that the Euro….?

    2. Anonymous says:

      Hi Shire

      It is a common issue these days that so many think that growth only comes from spending. Whilst I take clare’s critique of yesterday that we do need infrastructure spending I worry about the waste that often comes with it..

      As to the lack of SME finance it comes down to banks being able to persist and in many ways being emcouraged to persist with what we know is the wrong business model. We need reform but sadly it looks no nearer.

  4. Anonymous says:

    Shaun – another good article. Reverting to your headline, I think what we are seeing in Spain is what I can describe best as “the effects of seduction have profound impacts – often not seen for some time”. Yes, politicians of all stripes as well as a mass of the general public were seduced by not just cheap money but also what they could do/buy with this windfall. Now the wheel has turned full circle and the effects are now being felt by all. I cannot see how, in such a decentralised state, the central government can hope to pull in the spending horns of the regions….

    1. Anonymous says:

      Hi Ray

      You pose a good question. Is Spain capable of the change required? Her structrue certainly makes it difficult and what if the Catalan region presses for independence as the government is trying to discipline it?

  5. Spacemanc says:

    Real wages may be falling, but it’s making us more competitive which is vital for the recovery. This chart doesn’t show the UK, but I’m pretty sure that we would be closer to Spain than Germany if the UK was shown:

    http://imageshack.us/photo/my-images/607/labourcosts.jpg/Today's other news is that UK unemployment has fallen by 45000, which is pretty good in the current climate and even better when you consider that the public sector cuts are actually happening at the moment (whereas they were just talk a year or two ago)

    1. JW says:

       Spacemanc
      UK unemployment headline number has fallen because the UK economy is following the US towards a ‘part-time’ future.
      Germany needs to increase its wages for there to be any chance of a EZ solution.
      An economy is run on behalf of its citizens, to enhance their standards of living, not to ‘win’ some arbitrary race with other nations. Without real increases in wages the economy and the citizens standard of living will flounder. The trick is to to encourage real increases at a sustainable rate.
      Even the Germans are realising this, belatedly.

      1. Spacemanc says:

        The Germans have known the ‘trick of sustainability’ since the beginning, as shown by the chart that I posted!  

        Increases in wages are great if you can afford them, but if you can’t then it’s suicide to increase them, as we are seeing throughout Southern Europe.

        In the UK we are nearly the highest paid workers on the planet – why do you expect real increases in our wages, during one of the biggest financial crises of all time? We need to adjust to be competitive (so that we actually have jobs in the first place!) and then have neither falls or rises in real wages just as Germany has done.

        1. JW says:

           Spacemanc
          Germany entered into its latest ‘mercantile’ phase about 14 years ago, is this what you mean by ‘the beginning’? It was initially designed to overcome the problems of reintegration of the east, but became ‘mercantile’ when the planned increases in wealth of all were deliberately restrained.
          If the UK inflation rate reflected a country in ‘depression’, the real increases in wages would be more likely to be positive.
          Easy way to reduce comparitive wages versus ‘the rest of the world’ , crater your currency. Hey presto, competitive wages. Wonderful idea, the way to hope and happiness for all.
          If you are one of the 0.01% Spacemanc I can understand your motives, otherwise, you leave me somewhat confused.

          1. Spacemanc says:

            You’re confusing ‘mercantilism’ with competitiveness and ‘deliberately restrained increases in wealth’ with sustainable increases in wealth.

            I don’t believe that there is much of a case for real growth in wages until you have very close to full employment. What other reason would there be to justify higher wages? Where does the money come from?

            Btw, I’m most certainly not one of the ‘0.01%’ 

          2. JW says:

             Well you appear to be one of their firmest friends!

          3. Spacemanc says:

            Don’t dodge the question by getting personal. Justify a rise in real wages. Where does the money come from? Where does the money come from to raise the public sector real wages as well, because they won’t want to be left out.

          4. DarkM says:

            Fair comment – but there seems to be plenty of money around for Politicians, Directors etc to award themselves massive bonuses and huge salary increases. We even managed to “afford” a confilct in Libya last year (for no apparent benefit to the UK)……where did that money come from?

            A genuine question – no rise/falls in real wages, persistent high inflation = lower tax take, less ability to service “the debt” – pretty much a disaster in the making?

          5. Spacemanc says:

            Real wages mean that wages rise at the same rate as inflation, so basically you get paid the same for doing the same job.

            So currently wages are rising, around 1%, but real wages are falling because of the much higher inflation rate.

            Personally I’m happy with the rate of pay that UK politicians  receive as I don’t feel it’s excessive, but there are far too many of them in my opinion.

            Company directors also tend to get a fair rate of pay in my opinion. It’s a tiny number of ‘career’ directors for massive companies who receive the crazy rates that make the headlines.

          6. JW says:

             Spacemanc, my response for some reason has popped up at the start of ‘comments’

  6. Anonymous says:

    The ‘fusion’ of the four cajas serves several purposes. The main immediate one is to confuse prior year comparisons of their results and reduce transparency. It’s very hard to understand what is happening when you mix up several similar entities. Others include severing the local political and religious links that tend to distort the cajas’ priorities, dumping excess management and duplicated branches and maybe, possibly, strengthening the final balance sheet. But I agree, the end result will not be a huge improvement.

    1. Anonymous says:

      Hi barncactus

      My father is a student of the same school believing that many mergers are enacted with the purpose of muddying the waters for a couple of year or so. Meanwhile those in charge still get paid and often rather well…

      So it’s another form of can kicking.

  7. JW says:

     Spacemanc, there is no shortage of ‘money’, in fact there is far too much of the stuff. The last 30 years has seen capital taking an ever-increasing share of wealth over labour. I have often said on here that I believe that living standards in the ‘west’ are going to decline because of globalisation, automation, and demographics. However I dont believe we should follow economic policies that make this worse than it needs to be for the 99.9%.Chasing wages and labour costs down is a zero sum game. Next time you see a textile product with ‘made in china’ on it, its probably actually made in Bangladesh as vast swathes of Chinese industry relocates because of rising wages in China ( especially east China). Where next, Mars?
    Apologies if my short answer was felt to be personal.

    1. Spacemanc says:

      Well money is debt, so you’re right, maybe there is far to much of the stuff!

      When I talk about competitiveness, I’m not really thinking of textile workers in the Far East – if they wan’t those jobs, then it isn’t a massive loss to us, and you’re right that chasing the low skilled, low paid jobs around the world is futile. The real game is in hi-tec engineering and manufacturing and financial services (yes I said it!) and our competitor is not China – it’s the USA, Germany and Japan.

      If have full or nearly full employment (very achievable in my opinion, though not for a while in the current climate!), then real wages can rise, basically by pricing out the lower paid and lower skilled industry’s out of our economy.

      Right now we need to adjust our real wages to be competitive, which will bring down unemployment and grow our industries. Then we can achieve sustainable real wage rises. Remember that our current real wages are anything but real  – the bottom line is that they’re currently subsidised by debt which is anything but sustainable, and that’s the reason it would be crazy to be raising them right now.

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