Friday, February 13, 2009

Eurozone struggled in Q4 2008

Eurostat released figures today for the GDP of the Eurozone economies in Q4 2008, and Germany's performance in particular was worse than expected. Here's how the major European economies performed in 2008:

Country Q1 Q2 Q3 Q4

UK 0.4% 0.0% -0.6% -1.5%
Germany 1.5% -0.5% -0.5% -2.1%
France 0.4% -0.3% 0.1% -1.2%
Spain 0.4% 0.1% -0.3% -1.0%

When you look back to late last year, and the way the Germans in particular were insisting that this was an "Anglo-Saxon" problem and that the Brown-Darling team was engaged in "crass Keynianism" in the stimulus announced on Nov 24th, one is tempted to say to the Germans, "should have had a VAT cut, love". George Osborne, who loves to pop up quoting the Germans on the British economy (while the Tories still shun Germany in the Council of Europe and in the European Parliament), should pause to eat his words. The simplistic idea that if you don't have a housing boom, you are immune from recession, and if you have a trade surplus you are immune from recession just shows that the Tories have nothing in their heads.

It remains a fact that our government reacted more speedily to the crisis than other governments in the Western world - our stimulus was in time to support Christmas (and without the VAT cut, we would have seen a worse performance than the Germans), and the money hit the economy immediately. Germany didn't move till Jan and their stimulus involved raising income tax thresholds (something panicky Germans will save rather spend despite their economy badly needing domestic consumption to offset the drop in consumption elsewhere).

Osborne similarly complained about sterling dropping, but the fall in sterling helped exports rise in December, despite the massive drop in global demand. He's a total cretin for wanting a strong currency in these times.

I firmly believe that we will weather this recession better than other western economies, because our economy is more flexible than others (the sterling drop for instance) and our government is more agile than others.


Anonymous said...

So you are confident that Darling's pre-budget report of 10 weeks ago is correct and that UK GDP will decline by only 1% in 2009?

CROWN said...

The problem I have with the VAT rise is that I save 2.5% on everything I would have bought anyway and I am tempted to buy nothing extra just to save 2.5%. I would rather have a higher tax threshold and so give me more money in my pocket to decide if I spend it or save it, although I appreciate this does not help domestic spending in the short term, will benefit in the longer term.

Anonymous said...

I think the discussion has moved on. It is clear that everyone, both consumer countries, like the UK and US, and producers, like Germany and Japan, will suffer equally at the moment, since we were the buyers for their goods. Both sets of countries had unbalanced economies. The question is what happens after the World economy starts to recover. It is easy to see how Germany and Japan recover, people in the rest of the World start buying their goods. For the UK our high end economy was in financial services and that looks like it will be hobbled for quite a while. While we have a flexible labour market (less flexible than in 1997 though) our banking sector is sicker than most in Europe so the capital entrepreneurs need is going to be in short supply. The three things that propelled growth in the UK 2001-2007 were financial services, private spending though equity withdrawal and personal debt, and rising public spending. Given that the banks have crashed, house prices have crashed and the rise in government debt to deal with the banks and stimulate the economy means public spending will have to be frozen, if not cut over future years; the question has to be 'Where is the growth going to come from?'
I'm sure Britain will survive but it is going to be a very tough time and the period of this Labour government is not going to be seen as a golden age, but a fools paradise in a giant bubble, presided over by the biggest bunch of fools. Labour's reputation for economic competence is in ashes. It will be the Tories who pick up the pieces.

snowflake5 said...

Crown - if you were going to spend on something, but found that it was cheaper due to being taxed less, you have more left over (it means your disposable income has risen). Add this across all your purchases, and it's a substantial amount of money that you can use to either buy more or pay off debt. That's the point.

DevonChap - the point of my post was that it was obvious in late October/early November that global demand would be down sharply. Our government sprang into action, keeping the rise in personal allowance, bringing forward help for the old and cutting VAT. And the BoE slashed interest rates dramatically to increase people's disposable income, to allow them to repay their debts and support spending.

The Germans simply sat around discussing our policies, instead of recognising immediately that their economy was over-producing and under-consuming and that if they didn't stimulate domestic consumption, the only alternative was that the over-production has to stop, with attendant job losses. And that fool Gorge Osborne thought their actions were wonderful!

I don't think the world economy will simply go back to how it was. I think the UK will consume less and produce and export more (helped by a weak currency), and to balance this, the Germans, Chinese and others are going to have to stimulate their domestic consumption to offset our drawback. If they don't, they will go into freefall. I'm not sure they understand this though. They are desperately hoping that we go back to how it was before so they can free-ride on us, and instead of acting they are simply sitting on their hands and talking. Fatal. Krugman was right - we are lucky in the UK that we have an agile government.

Anonymous said...

Agile government!?!

Reckless and panicked yes. The government's reaction to the banking crisis has been either spin or counterproductive substance.

I shall being at the collapse of Lehman Bros which if it had been better handled would have allowed a more orderly handling of the crisis, given that since it was a huge counterparty. Barclays wanted to buy Lehmans to prevent its collapse but the idiotic tripartite banking regulatory system Gordon brought in stopped them. The FSA, looking only at Barclays' financial position vetoed it. If the Bank of England had been in sole charge it would have looked at the systemic impact and betted that it was better to let Barclays buy Lehmans then prop up Barclays than have the whole system collapse, not instead we had Brown's bean counters in to mess it up

Without the collapse of Lehmans AIG wouldn't have gone down and the dominos could have been held up; even if we would have had to shore up Barclays eventually the taxpayer would have been better off.

Then there is the HBOS-Lloyds merger the government forced on Lloyds. Without that we would have only needed to bail out 2 banks not three as Lloyds only needed taxpayer support because of the merger. HBOS would have had to be nationalised al-la Northern Rock. Given RBS is now 70% in government hands the creation of a badly needed 'Bad Bank' could have been started easily. Still the government won't take that bull by the horns.

The mortgage relief plans announced at the time of the Queen’s speech are still not finalised, the direct lending to businesses isn't working either. The government is announcing policies but is too busy preparing the next announcement to actually implement the first set.

This government is about as agile as a fat koala.

Anonymous said...

The Increases in retail sales in the past two months make absolutely clear that the 2.5% reduction in VAT has had a good effect.

Had more Governments abroad shown the same decisive action the problem would be lesser than it is.

We must hope that the G20 show more sense than the opposition in the UK.