On The Q4 2011 GDP Figures
Jan. 26th, 2012 12:31 pm![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
danieldwilliamNot great GDP figures yesterday. Preliminary estimates from the Office for National Statistics have GDP falling by 0.2% in the last quarter.
This is subject to revision once more data is in. The average revision from initial to final figures is about 0.27. So the actual figure could be anywhere between –ve 0.5% and +ve 0.1. The negativity is within the margin for error.
Is this an important number? Is it important that it’s negative?
One the one hand, not really. It’s one of a series of data points showing a generally weak recovery. Our GDP is still about 2.5% lower than it was in 2007. We’ve only recovered about half of the economic output we lost in the recession. In the last two years we’ve averaged 0.4% growth per quarter, which suggests we’ve another 5 years or so before our economy is as large as it was in 2007. Added to our own woes are the woes of neighbours and trading partners and the risk that something pretty bad might happen to the Eurozone. All of which points to a long slow patchy and uncertain recovery.
The fact that this quarter’s number is negative is less important than this trend of weak growth. If you offered me a 1% fall in GDP in Q4 2011 in exchange for a 1% rise in each of the four following quarters I’d take that over 0.1% increase in GBP in Q4 2011 and in each of the four following quarters.
What makes a negative growth number interesting is the pyschological impact of it being negative. Things didn’t just not get much better in Q4 of 2011. They got *worse*. Not only worse but worse than expected. Again. Oh Woe, and Lackaday. What’s the rational response to a worsening situation? On an individual basis it’s to sit tight, pay down your mortgage, pay into your savings account and keep your head down at work. Which, on aggregate removes demand from the economy and leads to reduce economic activity. The converse applies to business investment. In a situation where you expect your customers to cut back on their spending the rational response is to reduce your own investment in your business and to reduce your finacial operating risk by deleveraging or in English, paying down your mortgage so the interest doesn’t cripple you when sales are down.
There is some partisan posturing about the likelihood and the impact of a double dip recession. I can’t get too excited about a double dip recession. I’d take negative growth of 0.1% in two consecutive quarters over a fall in a single quarter of 1.0% and then a 0.5% increase the following quarter.
There appears to be no definition of a double dip recession. I think there are three possible definations, one where we have two recessions without a quarter where we have above trend growth, one where we have only one quarter of above trend growth before we have a second recession or, thirdly, a recession where we have a second recession before GDP returns to its pre-recession levels.
Depending on which definition you pick either the latest recession wasn’t a double-dip, as Q2 2010 growth was well above trend or double dip recessions are not unusual in the UK. However much bunkum shouting about a double-dip recession is in reality when people here that we’ve had a double dip recession their rational response is going to be more personal austerity.
There are a couple of things to think about when looking at weak GDP growth.
Firstly, the effect low economic growth has on the deficit and on the National Debt. Government tax revenues are a function of GDP and the % tax take from that GDP. The deficit is a function of the difference between tax revenue and government expenditure an the National Debt is a function of the accumulated deficits. The link between tax, government spending and growth and employment is pretty murky.
It’s possible to run a budget surplus in a time of falling GDP by cutting governement expenditure or increasing the tax take from GDP. It’s is certainly likely that with stagnant GDP and Hayakian liquidiation of unproductive assets the tax take is likely to be falling more or less in line with GDP.
Is it a good idea for the UK to increase its National Debt at the moment. That all depends on where you think we lie on the Modigliani and Miller Weighted Average Cost of Capital curve. Will our cost of borrowing be driven up by fears of financial distress? That’s a question which can only be answered empirically.
In any event, a key pieice of data to look out for is what is the % of GDP taken in tax doing.
A probable outcome of stagnant GDP and falling tax revenues and the ideological tendedancy of the current government is that there will be a further round of cuts to public services.
Secondly, jobs. Despite GDP increasing over the last few years from the bottom of the recession unemployment continues to rise. The accepted theory at the beginning of the recovery was that firms had hoarded labour, with workers exchanging pay cuts for headcount. Workers gaining by remaining in employment, firms gaining by not permanently destroying the productive capacity of their labour force. The effect was that unemployment rose rather more less than would have been expected for the fall in GDP. That position looks like it has changed. Firms appear to be realising that demand has fallen more permanently then they at first thought and are releasing hoarded labour. Elsewhere the effects of a long slow recovery taking their toll on over leveraged firms. Modigliani and Miller strike back.
The psychological impact of the combination fear of a negative outlook for the economy and current fears about employment again indicates more personal austerity.
With all this personal austerity about what are the prospects for a return to trend growth of 2-2.5%? Low, I think.
At some point our current depression stops being Hayakian and becomes Keynesian.
Thirdly, the distribution of GDP creation and appropriation. There are questsions of both demographics and geography.
There has been much talk about increasing income inequallity. The current recession and aftermath appears to have cemented a trend towards high earners appropriating a larger share of GDP and lower and middle income groups appropriating a stagnant or falling share of GDP. There is of course a difference between creating and appropriating value and any strategy that doesn’t deal with the issue of appropriation is probably flawed. As a member of the workers I think we should have a think about how we counter the ability of the monied classes to appropriate GDP to themselves.
The geographic distribution of GDP is worth watching. Not least as it forms an important part of the Scottish Independence debate. Some areas of the UK are doing okay, with strong local industries assisted by a fall in the pound against the currencies of trading partners since the heights of 2007. There are lessons to be learnt about what makes some of our cities and regions robust and some not. There is also a conversation to be had about how and how much of that robustness should be shared.
Finally, whenever I see GDP figures I try to remember that they are only a measure of input and the purpose of the economy is not to produce ever increasing GDP but to provide increased happiness. GDP is experienced differently by different classes of person.
GDP is a measure of material production of goods and services. Goods and services only make us happy to the extent that they fulfil our needs. GDP would be the same if we used 100% of our economy to produce tanks or chocolate. How happy a country full of tanks or chocolate makes you is up to you. There are other factors in addition to GDP that influence how happy we are. GDP is therefore a measure of input to happiness.
Changes in GDP are experienced differently by different classes of person depending on the cause of the change and where it happens and how this interacts with the circumstances of the individual.
A worker who is idle who wants to be employed is unhappy. A worker who is idle and wants to be idle is closer to happiness. Mr Micawber may yet be a good guide to anyone in employment.
The latest GDP figures are not good news. Far from it. However, they are part of a larger, longer and more complex picture and focusing on each quarters GDP figures as if that told you anything about the experience of the economy of the people who make it up is to miss the richer texture of what is going on.
This is subject to revision once more data is in. The average revision from initial to final figures is about 0.27. So the actual figure could be anywhere between –ve 0.5% and +ve 0.1. The negativity is within the margin for error.
Is this an important number? Is it important that it’s negative?
One the one hand, not really. It’s one of a series of data points showing a generally weak recovery. Our GDP is still about 2.5% lower than it was in 2007. We’ve only recovered about half of the economic output we lost in the recession. In the last two years we’ve averaged 0.4% growth per quarter, which suggests we’ve another 5 years or so before our economy is as large as it was in 2007. Added to our own woes are the woes of neighbours and trading partners and the risk that something pretty bad might happen to the Eurozone. All of which points to a long slow patchy and uncertain recovery.
The fact that this quarter’s number is negative is less important than this trend of weak growth. If you offered me a 1% fall in GDP in Q4 2011 in exchange for a 1% rise in each of the four following quarters I’d take that over 0.1% increase in GBP in Q4 2011 and in each of the four following quarters.
What makes a negative growth number interesting is the pyschological impact of it being negative. Things didn’t just not get much better in Q4 of 2011. They got *worse*. Not only worse but worse than expected. Again. Oh Woe, and Lackaday. What’s the rational response to a worsening situation? On an individual basis it’s to sit tight, pay down your mortgage, pay into your savings account and keep your head down at work. Which, on aggregate removes demand from the economy and leads to reduce economic activity. The converse applies to business investment. In a situation where you expect your customers to cut back on their spending the rational response is to reduce your own investment in your business and to reduce your finacial operating risk by deleveraging or in English, paying down your mortgage so the interest doesn’t cripple you when sales are down.
There is some partisan posturing about the likelihood and the impact of a double dip recession. I can’t get too excited about a double dip recession. I’d take negative growth of 0.1% in two consecutive quarters over a fall in a single quarter of 1.0% and then a 0.5% increase the following quarter.
There appears to be no definition of a double dip recession. I think there are three possible definations, one where we have two recessions without a quarter where we have above trend growth, one where we have only one quarter of above trend growth before we have a second recession or, thirdly, a recession where we have a second recession before GDP returns to its pre-recession levels.
Depending on which definition you pick either the latest recession wasn’t a double-dip, as Q2 2010 growth was well above trend or double dip recessions are not unusual in the UK. However much bunkum shouting about a double-dip recession is in reality when people here that we’ve had a double dip recession their rational response is going to be more personal austerity.
There are a couple of things to think about when looking at weak GDP growth.
Firstly, the effect low economic growth has on the deficit and on the National Debt. Government tax revenues are a function of GDP and the % tax take from that GDP. The deficit is a function of the difference between tax revenue and government expenditure an the National Debt is a function of the accumulated deficits. The link between tax, government spending and growth and employment is pretty murky.
It’s possible to run a budget surplus in a time of falling GDP by cutting governement expenditure or increasing the tax take from GDP. It’s is certainly likely that with stagnant GDP and Hayakian liquidiation of unproductive assets the tax take is likely to be falling more or less in line with GDP.
Is it a good idea for the UK to increase its National Debt at the moment. That all depends on where you think we lie on the Modigliani and Miller Weighted Average Cost of Capital curve. Will our cost of borrowing be driven up by fears of financial distress? That’s a question which can only be answered empirically.
In any event, a key pieice of data to look out for is what is the % of GDP taken in tax doing.
A probable outcome of stagnant GDP and falling tax revenues and the ideological tendedancy of the current government is that there will be a further round of cuts to public services.
Secondly, jobs. Despite GDP increasing over the last few years from the bottom of the recession unemployment continues to rise. The accepted theory at the beginning of the recovery was that firms had hoarded labour, with workers exchanging pay cuts for headcount. Workers gaining by remaining in employment, firms gaining by not permanently destroying the productive capacity of their labour force. The effect was that unemployment rose rather more less than would have been expected for the fall in GDP. That position looks like it has changed. Firms appear to be realising that demand has fallen more permanently then they at first thought and are releasing hoarded labour. Elsewhere the effects of a long slow recovery taking their toll on over leveraged firms. Modigliani and Miller strike back.
The psychological impact of the combination fear of a negative outlook for the economy and current fears about employment again indicates more personal austerity.
With all this personal austerity about what are the prospects for a return to trend growth of 2-2.5%? Low, I think.
At some point our current depression stops being Hayakian and becomes Keynesian.
Thirdly, the distribution of GDP creation and appropriation. There are questsions of both demographics and geography.
There has been much talk about increasing income inequallity. The current recession and aftermath appears to have cemented a trend towards high earners appropriating a larger share of GDP and lower and middle income groups appropriating a stagnant or falling share of GDP. There is of course a difference between creating and appropriating value and any strategy that doesn’t deal with the issue of appropriation is probably flawed. As a member of the workers I think we should have a think about how we counter the ability of the monied classes to appropriate GDP to themselves.
The geographic distribution of GDP is worth watching. Not least as it forms an important part of the Scottish Independence debate. Some areas of the UK are doing okay, with strong local industries assisted by a fall in the pound against the currencies of trading partners since the heights of 2007. There are lessons to be learnt about what makes some of our cities and regions robust and some not. There is also a conversation to be had about how and how much of that robustness should be shared.
Finally, whenever I see GDP figures I try to remember that they are only a measure of input and the purpose of the economy is not to produce ever increasing GDP but to provide increased happiness. GDP is experienced differently by different classes of person.
GDP is a measure of material production of goods and services. Goods and services only make us happy to the extent that they fulfil our needs. GDP would be the same if we used 100% of our economy to produce tanks or chocolate. How happy a country full of tanks or chocolate makes you is up to you. There are other factors in addition to GDP that influence how happy we are. GDP is therefore a measure of input to happiness.
Changes in GDP are experienced differently by different classes of person depending on the cause of the change and where it happens and how this interacts with the circumstances of the individual.
A worker who is idle who wants to be employed is unhappy. A worker who is idle and wants to be idle is closer to happiness. Mr Micawber may yet be a good guide to anyone in employment.
The latest GDP figures are not good news. Far from it. However, they are part of a larger, longer and more complex picture and focusing on each quarters GDP figures as if that told you anything about the experience of the economy of the people who make it up is to miss the richer texture of what is going on.
