Deficit finally large enough for a bit of stability and growth?
U.K. Economy Surges 1% as Britain Exits Double-Dip Recession
By Scott Hamilton and Jennifer Ryan
October 25 (Bloomberg) — Britain exited a double-dip recession in the third quarter with the strongest growth in five years as Olympic ticket sales and a surge in services helped boost the rebound.
Gross domestic product rose 1 percent from the three months through June, the fastest growth since 2007, the Office for National Statistics said in London today. That exceeded the highest estimate in a Bloomberg News survey for growth of 0.8 percent. The median forecast of 33 economists was 0.6 percent. The pound rose after the data were published.
The growth surge reflects a boost from the Olympics and a rebound from the second quarter, when GDP was affected by an extra public holiday. While the data may give some short-term relief to Prime Minister David Cameron’s struggling government, Bank of England Governor Mervyn King said this week that the recovery is “slow and uncertain.” That suggests the figures mask underlying weakness that could warrant further stimulus from the central bank.
“We’re still concerned the U.K. economy is going to be pretty much flat throughout next year,” James Shugg, an economist at Westpac Banking Corp. (WBC) in London, said on Bloomberg Television’s “The Pulse” with Maryam Nemazee. “It all depends how rigidly determined the government is to stick to its deficit reduction plan.”
Ticket Sales
Services, which make up about three quarters of GDP, surged 1.3 percent in the third quarter from the previous three months, the most in five years, the ONS said. Olympic ticket sales are estimated to have added 0.2 percentage points to GDP. Production rose 1.1 percent, the most in more than two years, while manufacturing increased 1 percent. Construction output fell 2.5 percent, a third straight quarterly decline.
The pound extended its gain against the dollar after the report and was trading at $1.6134 as of 10:52 a.m. in London, up 0.6 percent on the day. Bonds declined, pushing the yield on the 10-year government bond up 8 basis points to 1.93 percent.
From a year earlier, GDP was unchanged in the third quarter, the ONS said. That compared with a decline of 0.5 percent forecast by economists in a separate Bloomberg survey.
While today’s data confirm Britain exited its first double- dip recession since 1975, GDP is still 3.1 percent below its peak in the first quarter of 2008. The report also showed that the economy has grown 0.6 percent since the third quarter of 2010, just after Cameron’s coalition government came to power.
Economy ‘Healing’
Cameron urged caution on the GDP data, saying there is “still much to do.” The opposition Labour Party has accused his government of exacerbating the economic slump by sticking to its fiscal squeeze. Ed Balls, Labour’s finance spokesman, said today the economy “remains weak” and “is only just back to the size it was a year ago.”
“There are always one-off figures in all of these announcements but they do show an underlying picture of good and positive growth,” Cameron said. “We’ve got to stick with the program.”
The data today are an initial estimate and the figures are subject to revision when the ONS gets more information. In the second quarter, the decline in GDP was revised up to 0.4 percent from an initially reported 0.7 percent.
Britain is the first of the Group of Seven nations to report GDP data for the third quarter. U.S. growth probably accelerated to a 1.9 percent annual rate after expanding at a 1.3 percent pace the prior quarter, according to a Bloomberg survey before a Commerce Department report tomorrow. It would be the first back-to-back readings lower than 2 percent since the U.S. was emerging from the recession in 2009.
Deficit Reduction
The U.K. data come two weeks before the Bank of England’s Monetary Policy Committee must decide whether to end its stimulus program or extend it beyond 375 billion pounds ($605 billion). Governor Mervyn King said this week that a “zig-zag” pattern of recovery is likely to persist.
Debenhams Plc (DEB), Britain’s second-largest department-store chain, said today that the U.K. experienced “challenging trading conditions during 2012.” Whitbread Plc (WTB) Chief Executive Officer Andy Harrison said the consumer market is “pretty flat” and generating any growth is “jolly difficult.”
Stripping out one-time distortions, the National Institute of Economic and Social Research said on Oct. 9 that third- quarter growth was closer to between 0.2 percent and 0.3 percent.
Inflation Cools
Still, recent data have shown pressure on consumers easing. Inflation cooled to the slowest in almost three years in September, while retail sales increased more than forecast. Payrolls rose to a record in the quarter through August, pushing the unemployment rate down to 7.9 percent from 8.1 percent.
“At this stage, it is difficult to know whether some of the recent more positive signs will persist,” King said on Oct. 23. “The MPC will think long and hard before it decides whether or not to make further asset purchases. But should those signs fade, the MPC does stand ready.”
Elsewhere in Europe, Sweden’s Riksbank kept benchmark interest rates unchanged at their lowest level since early 2011 and said further easing has become more probable as growth slows in the largest Nordic economy.
“Deficit finally large enough for a bit of stability and growth?”
I have pointed out to the government that if they want to trash the economy properly they are going to have to do more than just cut infrastructure spending a bit – which then just moves to the benefits bill and reduced tax take.
How large are those deficits by now?
Let’s see next quarter. This report was tainted by the Olympic games.
true, but still flat to positive at this point
@Jesse Frederik, They could manage a Triple Dip if they stick with their austerity plans, especially with Europe intent on flushing itself down the toilet.
From a political perspective I see no way growth in the British economy is sustainable. The current pernicious government will not tolerate rising deficits, as evidenced by Minister Scrooge a few days ago:
http://www.telegraph.co.uk/active/9623053/Roll-up-your-sleeves-and-find-jobs-minister-tells-unemployed.html
As Hamish wrote, they’re going to cut themselves right into a triple dip recession.
“Deficit finally large enough”
Did the deficit increase, or did the need for it decrease (perhaps due to the Olympics improving the trade balance, or increasing private spending at the expense of private saving)?
And if the deficit increased, wasn’t that due to austerity, trying to decrease it, and not to any intent to increase it?
I’m trying to get my mind around the causality of deficits. Does the deficit determine the economy, or vice verse? Does it depend? Are there time lags? Surely if the government, without warning, send a check to everyone on the last day of the quarter it would not affect the economy in that quarter. Would the effect be totally felt in the following quarter, or would it take longer to play out? Would the deficit over that period of playing out be larger or smaller than if the checks had not been issued?
@John O’Connell, “Did the deficit increase . . . [?]”
Yes.
“. . . or did the need for it decrease (perhaps due to the Olympics improving the trade balance, or increasing private spending at the expense of private saving)?”
No. British houesholds are in poor straits, to much for a mild one-time stimulus lke the Oplympics to have a significant long-term effect.
“And if the deficit increased, wasn’t that due to austerity, trying to decrease it, and not to any intent to increase it?”
Yes.
“I’m trying to get my mind around the causality of deficits. Does the deficit determine the economy, or vice verse?”
Savings preference of the private sector determines economic health. If they save more, the economy declines. If they save less, growth increases. When the private sector decides to entrench and cut spending, this reduces incomes, which reduces employment, which reduces government revenues. At the same time government outlays are increased (welfare payments). Deficits are taking up some of the slack in private sector spending and attenuating the recession.
“Does it depend?”
Unfortunately pretty much everything in life depends on the circumstances. It’s complex.
” Are there time lags? Surely if the government, without warning, send a check to everyone on the last day of the quarter it would not affect the economy in that quarter.”
Depends on the size of the checks in relation to household desire to save. Capacity to quantify expansionary or contractionary policy outcomes usually lags 6-12 months.
govt spending/tax policy causes things.
and yes, this time the deficit went up the ‘ugly way’ but it did go up.
check older posts for more detailed discussions, thanks
@WARREN MOSLER,
Going up the ugly way implies that the economy suffered from the austerity, tax receipts went down and/or spending went up. That seems incompatible with growth of 1% QoQ.
“Does the deficit determine the economy, or vice verse?”
Causality runs both ways. It’s a feedback system.
“Would the effect be totally felt in the following quarter, or would it take longer to play out?”
I’m pretty sure it would take longer to play out.
“Would the deficit over that period of playing out be larger or smaller than if the checks had not been issued?”
No doubt it would be larger. Even if the government spent the money instead, then more of that money would be taxed as private sector income right from the start.
I’m not a fan of Warren constantly intimating that deficits are large enough or not large enough based upon the latest economic data. I realize he’s just making a point that the government should make fiscal adjustments up or down until the economy starts moving in the desired direction, but these frequent interjections about the proper size of the deficit appear to suggest that MMT has predictive power that it simply doesn’t have.
Gross domestic product rose 1 percent from the three months through June
How could anyone possibly make that determination? What’s the margin for error in that conclusion? If my blood pressure goes up 1% over the next three months, should I check into the Mayo Clinic? The Brits paid suppliers and workers to construct necessities like a state-of-the-art velodrome, the “Pringle”, at a cost of over 105 million pounds, for the Olympic games. It has seating for over 6000 track cycling enthusiasts. Wanna bet on when the next occasion that’s it’s filled to capacity rolls around?
Would ticket sales and hospitality services to foreigners be considered exports?
I would call them that
@Dan Catron,
Yes, absolutely. We think of “exports” as product leaving the country, but in fact it is money coming in. Many economies in Warren’s part of the world thrive on tourism, which is an export industry.
As an aside, tourism would seem not to be a “cost”, like the cost to China of sending ipads to America. Maybe the resources consumed by the tourists while they stay could be considered a cost.
the labor input is a cost