Duncan’s Economic Blog

The Poor UK Outlook

Posted in Uncategorized by duncanseconomicblog on July 21, 2011

Ahead of Q2 GDPnext Tuesday I have a post on False Economy, noting how our economic prospects are worsening.

This echoes the important points made yesterday by Chris Dillow.

But it’s not just me and Chris noting this – yesterday’s Bank of England minutes were filled with gloom.

Whilst much attention has been focussed on the cuts in government spending, and the prospects for Osborne’s preferred drivers (investment and exports), the Bank notes the problems facing the consumer and crucial importance of the savings ratio. A point I have made in the past.

As the MPC say:

The outlook for activity in the medium term would depend in part upon the prospects for consumption and its major determinants. The level of consumption over the past year had been significantly weaker than the Committee had previously expected. Over the same period, households’ real post-tax disposable incomes had fallen by more – reflecting the impact of increased VAT, and higher energy and other commodity prices – and the household saving rate had declined by about 1.5 percentage points. It was possible that households adjusted their spending patterns only gradually, suggesting that the past decline in real incomes could continue to weigh on consumption growth for some time to come and that the saving rate would tend to rise. Alternatively, it was possible that households had already largely adjusted their spending in response to the past shock to their income, in which case there would be less upwards pressure on the saving rate in the future.

 

And we also now have the latest update from the Treasury of the views of independent forecasters – the chart below shows how the average 2011 growth forecast has changed over time.

It isn’t a pretty picture.

Forecasters now estimate growth in 2011 will be 1.3% and the trend is towards more downgrades.

Whilst attention is rightly on the potential calamity in the Eurozone and the prospect of a partial US default – our own economy is weakening before the disaster hits.

11 Responses

Subscribe to comments with RSS.

  1. Dave Holden said, on July 21, 2011 at 10:45 am

    “The level of consumption over the past year had been significantly weaker than the Committee had previously expected. Over the same period, households’ real post-tax disposable incomes had fallen by more – reflecting the impact of increased VAT, and higher energy and other commodity prices …”

    They obviously forget to add “… and because of our policy of ignoring our own inflation target, quantitative easing and just general financial repression”

    You really have to laugh. Seriously the economics profession is a total disgrace.

  2. gastro george said, on July 21, 2011 at 5:34 pm

    But Dave, surely the response to not ignoring the inflation target would have been more financial repression – higher interest rates would cut disposable incomes more. Or do you think that any rise in savings interest would be more than the rise in mortgage/loan interest?

    • Dave Holden said, on July 22, 2011 at 1:02 am

      Hi George,

      I agree. I was just irked by what I saw as the disingenuous nature of that paragraph and the fact that some commentators never seem to point out there is a down side to low interest rates and QE. The interest rate is in effect a transfer of wealth from savers to borrowers and QE is a transfer of wealth from those who can’t invest in risk assets (the poor) to those who can (the rich).

      • gastro george said, on July 22, 2011 at 11:19 am

        I don’t think there’s much empirical evidence that QE has done anything apart from divert investment into other asset classes, which has either propped them up or created new potential bubbles, which is what MMT would have predicted.

        • Dave Holden said, on July 22, 2011 at 12:21 pm

          “QE has done anything apart from divert investment into other asset classes”

          But those “other asset classes” are the risk ones, i.e. the ones the poor have no access to meanwhile inflation is double target and wages are falling – a double whammy.

          • gastro george said, on July 24, 2011 at 12:22 pm

            I kind of get where you’re going on this. QE has served to prop up asset prices, and that only serves the interests those who own those assets. It should only serve the purpose of preventing an asset crash (and shock the economic system) but it’s most likely gone beyond that.

            While QE isn’t exactly “printing money”, if we were to do that, it would be better to spend it on infrastructure projects (one could argue that the Olympics construction project has, in that respect, been a boon for both Labour and Tory governments). Or, even better, higher benefits payments, because we know that money will be spent (and not saved) when the multipliers kick in.

            • Dave Holden said, on July 25, 2011 at 10:12 am

              It didn’t just prop up assets its caused a bubble – as witnessed in the commodity speculation. So those with assets and the means to speculate got a short high while those who haven’t suffered from price increases in the things they *need* to buy.

              • gastro george said, on July 25, 2011 at 11:25 am

                Oh, absolutely.

  3. jomiku said, on July 21, 2011 at 11:15 pm

    I wonder how the projections reflect the austerity movement in the Eurozone. Given the idiotic pronouncements issued, they intend to contract as though sweating out a fever. It’s difficult for your economy to expand when your largest market is committed to contraction.

  4. George Irvin said, on July 23, 2011 at 10:49 am

    @jomiko & others:

    However silly the contractionary policies of the Euro Area may be (less contractionary than those of Geo Osborne), domestic consumption demand is a far larger proportion of the total than net exports. As for inflation, if you believe this is the real enemy, you might recall that UK inflation—mainly imported and currently falling—is running at about the same rate as during the ‘golden age’ of post war growth.

    • Jomiku said, on July 23, 2011 at 10:13 pm

      That’s why I phrased my question that way. And my understanding is the budget projections relied on export growth. You do have a separate currency for a reason.


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: