Friday, July 25, 2008

UK Economy grew by 0.2% in Q2

Figures out today from the ONS showed that the UK economy grew by 0.2% in Q2 2008 - identical growth to that which we had in Q1 2005, just before the 2005 general election.

Conservatives who have been confidently predicting that we were in recession in Q2 will be bitterly disappointed. As expected, construction decreased sharply, but transport, service and communications increased strongly (by 2.2% compared to 0.7% in Q1). Post and telecommunications made the largest contribution to the aceleration. I expect this is because people are taking to ordering goods cheaply online (which requires post delivery) rather than going to town centres. Financial services were weak, but computer services were strong.

The significance of this GDP result is that New Labour have now completed 11 full years of consecutive growth in GDP - a record that no other British government has ever achieved. It's a pity that the news has come on the day of the by-election defeat in Glasgow East and thus overshadowed.

Still, whatever happens, we have set the benchmark for all future governments this century. Any government who cannot deliver eleven consecutive years of growth will be deemed a Failure.

I'm sure Tories are rushing to claim that this was all down to "favourable world conditions". Actually, world conditions in the last eleven years have been anything but favourable. In 1998, Russia defaulted on her sovereign debt, a hedge fund went bust, there was a credit crunch similar to that today and there was a capital flight out of the asia economies plunging them into recession (including Japan, whose economy contracted by 2% in 1998 and by 0.1% in 1999 - a very severe recession by any standards). In 2001 the USA was in recession for eight months following the dot-com bust and 9/11. In 2003, France, Germany and Italy all went officially into recession. In Germany things got so bad that unemployment climbed to over 10%, the highest since the 1930's.

But in Britain, we just sailed on. If it was really down to "world conditions" then the USA, Japan, France, Germany and Italy would not have experienced any recession either, seeing as "world conditions" applied to them too.

I believe we will come through the current global crisis too, as long as the Labour government is in power. We have been living in a fantastic golden age, which will come to an end when New Labour finally exit the scene. Apr├Ęs New Labour, le deluge.


Anonymous said...

Of course it could be said that the 11yrs were a combination of a golden legacy from Ken Clarke and a boom fuelled by credit and mortgage equity withdrawls.

Brown likes to blame the credit crunch but what really will stop his growth in GDP is the bursting of the house price bubble.

Personal debt got out of control - now the hard work come paying it back. Has Gordon any answers ?

snowflake5 said...

harry flashman - Tories trying to take credit for the Labour boom again eh? Come on. Conservatives were in power for 18 years. During that time they never managed to have eleven consecutive years of growth - instead they gave us two very nasty recessions. Ken Clarke was a chancellor for a mere 3 years. Anyone can have three years of growth - even useless Dubya Bush managed it, as did Saddam. But having eleven years of growth is something else. It's churlish of you to try to pretend that the three KenClarke years meant everything and the eleven Labour years meant nothing. Admit it - Labour have achieved something that the Conservatives have never done, and never will.

As for the credit crunch - fixed rates are coming down. The oil price is coming down (it closed at $125 pb compared to a high of $147 - a 15% drop). The Halifax and RBS have recapitalised successfully.

Of course you are predicting a recession - but Tories have predicted a recession in each of the last eleven years - and been wrong every single time. Perhaps because it's because you rely on wishful thinking instead of any ability to read the data.

Anonymous said...

Interest rates are only coming down for those with big deposits.

But don't take my Tory words for it..

The housing market is in a death throw:

The economy shrank in May and June

Retail sales are tanking

And the UK is in serious debt

The ninetys were painful - but they had to be to get the Uk in a better shape after the disasterous 70s when we were run by socialists and unions.

If you think the last 10 yrs have been a golden age leaving the Uk in tip top condition then you are mistaken IMHO.

snowflake5 said...

harry flashman - the recession of the 90's did not have anything to do with the 70's, anymore than the 70's had anything to do with the 50's. The recession in the 90's happened because Nigel lawson cocked up in his budgets in the late 80's, releasing a torrent of cash into the economy while trying to keep the pound and interest rates artificially low. i.e. it was a recession made in Torydom

Anonymous said...


Could you expand on your diagnosis of the policy errors of the late 1980s? As I understand you, your are saying that the primary error was one fiscal laxity in some or all of the budgets from 1984-1989, most probably 1986-1989. Which of these budgets do you think was the most mistakenly loose and why?

You then indict Lawson for trying to keep the pound and interest rates artificially low - so it seems that monetary policy rather than fiscal policy is under your attack. As I understand it, Lawson favoured higher interest rates and a capped exchange rate whereas Thatcher favoured appreciating Sterling and more modest interest rates. John Smith as Shadow Chancellor sided with Thatcher against Lawson.

Do I characterise your position accurately in saying that you believe (as Lawson, in retrospect, conceeded) that the overall mix of interest rates and exchange rates should have been tighter? I infer that you would then have expected econonomic growth and the PSDR to have been lower, leaving less room for income tax cuts. If that is the case, then your reply to HF seems back to front: monetary errors begat fiscal ones not vice versa.

snowflake5 said...

Alan Peakall - the problem with Lawson was both fiscal and monetary policy. The economy was growing strongly in 86,87, and 88 - at one point growth was over 5%, the economy was red-hot - therefore fiscal policy should have been very tight. But Lawson released a flood of money into the economy, with his dramatic tax cuts. I think he wanted to "make a name" for himself as a legendary tax-cutter. He should have gone uber-slowly, shaving the tax rate with great control over a period of say 10 years, while maintaining tight monetary policy every time the economic growth went over 3%, so as not to de-stabalise things. Instead he did cut tax all at once.

Once the money hit the already strong economy, inflation started to surge as though on steroids. He needed to raise rates and fast to mop up the money he'd put into the economy. But he didn't. He did the opposite. He kept the base rate circa 8% (way too low) from 1986 to 1988, because he was targetting the D-mark. When inflation was finally completely out of control and hitting 10%, he started putting rates up dramatically and they had to go up higher than if he'd not made a mess in the first place. In the end going into the ERM at a tight exchange rate squeezed the inflation out of the system.

People forget, but as a result of this roller-coaster, growth was just 1% in 1989, and then from Q4 1990 to Q2 1992 we were in recession.

The problem with Lawson (and most Tories) is that they lack control and have too much taste for drama.

If you contrast this with what the Labour government has done - fiscal policy was very tight from 1997 to 2001, when the economy was growing strongly. 2001-2005 was a period of global weakness - during this period the USA, France, Germany, Italy and Japan all dipped into recession at some stage. The Americans opted to cut interest rates to 1% and to loosen fiscal policy through tax cuts. In the eurozone they had tight fiscal policy, and cut interest rates to 2% (a real interest rate of zero). In the UK we maintained a high real interest rate, much higher than all our competitors, and opted to loosen fiscal policy instead. And because interest rates were relatively higher than our competitors, the £ to strengthened sharply during this period, which also helped on the inflation front. This is the reason we have lower inflation in the UK compared to the USA and eurozone.

George Osborne has frequently said that if he was in government from 2001 to 2005 he would have tightened fiscal policy. If he had done this, we would certainly have followed countries like Germany into recession. And if he had had a tight fiscal policy and loosened monetary policy instead, to try to keep the economy growing, house prices would have really surged in a way that would have made the recent period seem moderate. We have essentially had eleven years of growth because the Labour party has followed a counter-cyclical policy in a controlled way.

And when Gordon Brown says he has abolished boom and bust, this is literally true. We haven't had the highs or the lows that we saw in tory times. Going from 5% growth to -2% in a matter of five years is painful. Moving gently from 2.5% to 1.5% is not.