Tuesday, May 19, 2009

Looking at how different approaches to the recession have produced different results

Eurostat published Q1 GDP figures on the 15th, and they were all but ignored because of the expenses scandal. But it's worth looking at to see how different approaches to the crisis have affected economic performance

All the following figures for GDP are growth per quarter. Eurostat also show American GDP stated per quarter, for comparison.

Country Q208 Q308 Q408 Q109

France -0.4% -0.2% -1.5% -1.2%
Germany -0.5% -0.5% -2.2% -3.8%
Italy -0.6% -0.8% -2.1% -2.4%
Spain 0.1% -0.3% -1.0% -1.8%
UK 0.0% -0.7% -1.6% -1.9%
USA 0.7% -0.1% -1.6% -1.6%

All the countries that stimulated have mitigated the bad effects of the recession.
The Americans in particular have applied several stimuluses to their economy. Their growth was positive in Q208 because the Bush stimulus bill signed in Feb 2008 released $178bn in tax rebate cheques in May 2008, then $300bn for distressed homeowners in July 2008, and then Obama signed a $787 billion package in Feb 2008. No wonder the American economy is doing less badly than everyone elses.

Elsewhere the centre-left Labour govt of the UK and the centre-left socialist govt of Spain also stimulated in the fourth quarter of 2008. The Germans didn't bother and the Italians under Berlusconi were also slow.

Germany belatedly started to take action earlier this year. But the delay has been costly - some economists reckon that the cost to fix things will be more than the cost of re-unification. The real cost of recessions is the drop in tax revenue - and the longer and deeper the recession is, the worse that cost is. Germany has now admitted that it will experience it's biggest budget deficit since WW2. It's actually cheaper to go for a stimulus early to mitigate the recession and ensure it is short-lived than to let it run and run. Tories like George Osborne cheered Germany to the rafters when they were making their idiotic comments last Sept about "crass Keynesianism". But they are strangely silent now.

It's not fashionable to say this, but we in Britain were lucky to have Gord at the helm in Sept 2008. No one else would have had the sense to take the right course of action.


DevonChap said...

Correlation is not the same as causation. Just because Germany did not stimulate at the same time as the UK does not mean its decline is linked to the lack of immediate stimulus. Germany and Japan have similar export led manufacturing economies. Both have seen massive cuts in demand as their customers globally reduce their inventories. The Japanese Q1 GDP figures were too late for Eurostat but they contracted 4% in Q1 09. This is despite Japan stimulating early. So it looks like the sharp decline for those economies couldn't have been stopped by a stimulus, the effect will be over the next 18 months. Please note that Germany can afford a much larger stimulus that the UK.
When gloabl demand picks up Germany and Japan should pick up with it since those inventories that have been thinned out will be increased. The UK will have to deal with large budget cuts (larger than the early 1980s) and tax rises at the same time the world economy is recovering. Our recovery will be weaker.
If you look at the helpful table the Economist put out a couple of months ago you can see that the UK actually has a modest stimulus compared to its competitors (because of our existing budget deficit).


Country Q408 Q109 Stimulus France -1.5% -1.2% 1.5%
Germany -2.2% -3.8% 3.1%
Italy -2.1% -2.4% 4.3%
Spain -1.0% -1.8% N/A
UK -1.6% -1.9% 1.1%
USA -1.6% -1.6% 5.8%
Japan -3.2% -4.0% 2.0%

There doesn't seem to actually be much correlation between the size of the stimulus and the fall in GDP.
The country you didn't mention in your summary was France which has cumulatively done much better than the other countries in your comparison.
Lucky to have had Gordon, no! He left the cupboard empty so that when we needed a boost all we could give was a limp shove. And the debt will hold back the economy for decades to come.

SheerJunius said...

Yeah, really lucky. What about those scumtastic Labour peers selling laws for cash? No Tories, no Lib Dems, just pure Labour.

But the media was just picking on them, right?

Quietzapple said...

Certainly no other alternative of whom I know much would have acted so expeditiously, or on so broad a range of fronts, in the face of abuse, oppopsitionism and occasional libels . . .

They tried to get rid of him before nominations to Labour's leadership opened, calling on possible opponents to stand . . they know which Labour politician delivers the goods which dish the parties which need a new leader every 4 years.

Worth recalling that Great Britain's Gordon Brown managed to avoid the USA led recession of 2001 as well.

Anyone fancy a rerun with Osborne in the role . . ?

Perhaps the tories practiced pranging our economy enough in the '80s & '90s: 2 recessions, and Black Wednesday wasn't it?

snowflake5 said...

DevonChap - it was obvious to all but the wilfully blind that as global trade slowed due to the recession, German exports would fall off a cliff and their GDP and tax revenue would collapse too. Agreed?

The idea of a stimulus is to offset decline in exports by stimulating domestic demand. What Germany actually needed was a VAT cut to stimulate shopping. Instead they sat on their hands and are paying the price.

You mention Japan's stimulus - but it wasn't targetted at the domestic consumer. If you have depressed domestic demand and are reliant on exports, but the markets for those exports has disappeared, then stimulating domestic demand is the only answer.

You also fall into the trap of believing that even the global economy rebounds, it will go back to how it was in 2007 - i.e. the Anglo-Saxons over-consuming to buy the goods from the Germans and Japanese. I doubt it. Demand in the UK and USA will increase but not sufficiently to support other countries. Germans are currently on there day weeks designed to keep staff and factories while they "wait" for everyone else to consume again. And if they are waiting in vain? Those factories will be closed for good, and the tax revenue they used to provide will also go. Theirs is a perilous situation.

PS You keep talking about Germany being "better placed" than the UK - but according to eurostat German national debt was 65% of GDP before Oct 2008, compared to the UK's 51% (and that was after the UK took on Northern Rock's liabilities onto the book even though these liabilitis are not being serviced by tax money but by the income from N Rock's assets). Given the rate German GDP is contracting, and their fall in tax revenue, I would say their situation is deteriorating much faster than ours.

Quietzapple said...

Sam Brittan says:

Why should it be more alarming for governments to get into debt to put people into useful work satisfying human needs than to borrow for guns and tanks whose only aim is to kill other human beings?

Try http://www.samuelbrittan.co.uk/ for more from one of the economists who supported Mrs Thatcher when hardly any economist did.

And try: http://www.ifs.org.uk/bns/bn26.pdf for the historical perspective on how UK national debt has changed over the years. Our WW2 debt was only finally paid off on Gordon Brown's watch.

Amusing, is it not, that many right wing commentators objected to HMG's quite correct use of the Terrorism Act against the Iceland Government when they threatened to cut loose their banks foreign debts? Daniel Hanan and others felt soooo sorry for the Icelandic Government - they viewed it as "libertarian" LOL.

Tendentiousness, thy name is Tory.

DevonChap said...

Germany's budget deficit in 2010 forecast to be 6%, our forecast to be 12% (our tax revenues have fallen off a cliff since we relied on banking profits). Doesn't take many years of that for us to catch and pass Germnay in therms of total debt. S&P forecast UK debt 100% GDP by 2013.

Germany went into the recession with a balanced budget, so once things even out (and things will eventually, you forget a certain country called China that has a major demand for the machine tools etc Germany produces) they can run a surplus with fewer cuts to repay the borrowing.

The UK went into recession with a structual 3% budget deficit so that even if things went back to how they were in 2007 we would still need to make large spending cuts to repay the debt. Whoever wins the next election will have to make swinging cuts. Remember that when you decry "Tory cuts".