Is Britain economic stimulus failing to ensure UK economic recovery?

Is Britain economic stimulus failing to ensure UK economic recovery?

The latest news suggested that Britain is in recession. All major City analysts had predicted a recovery for the quarter ending July to September 2009 of around 0.2% on the Office of National Statistics (ONS) figures but the UK economy actually contracted by 0.4%.
BBC : http://news.bbc.co.uk/1/hi/business/8321970.stm: The article confirms the prediction by City analyst who was said to be disappointed by the revelation leading to a drop in business confidence and also, the sterling against most major currencies notably the US$ and €. The article also noted that a lot had been done through the Quantitative Easing(QE), and support of spending which does not seem to show any progress at all and pushed Britain to produce record of 6 quarters in recession. Personally, I think comparing against the likeness of events that took place in 1955 is rather immature especially when the size of the economy, the impact of other contextual factors such as globalisation, technology revolution, information technology were not so prevalent during that time. Also, on reflection of some of the elements that made up the GDP, the lack of manufacturing activity today and the huge service industry contribution, makes it a weak comparison.

RBS : http://www.rbs.com/downloads/pdf/economic_insight/cewb/19-10-2009-cewb.pdf
RBS Chief Economist, Andrew McLaughlin weekly brief on 19/10/2009 suggested that UK’s Consumer Price Index which is a measure of inflation remained positive at 1.1% as compared to the US and euro zone. This is to me an obvious indicator that the amount of government spending actually helped the economy to show some resilience in a very uncertain and dangerous financial environment. Lower interest rates and increase in money supply through QE and support for commercial loans and mortgages have proved to be successful. I think that the UK government have applied the right pressures by scientifically adopting a pro Keynesian and monetary approach to help rescue the UK economy. The brief also reported a recovery in the home market with the Royal Institute of Chartered Surveyors confirming this fact.
Guardian:http://www.guardian.co.uk/business/2009/aug/13/france-germany-welcome-economic-surprise reported that both Japan and Germany produced an economic surprise by both countries posting a 0.3% economic growth respectively in the quarter to June 09 when UK posted a contraction of 0.8%. Among the factors noted in the article was the success of both the former economies that were less dependent on the service sector, consumer debts were relatively lower than UK and business relationship with banks meant that credit lines were secured. I believe that there may be some truth in this but both France and Germany who did not seem to back significant government intervention may see their “economic surprise” short-lived. Why? I think that Alistair Darling’s interview with BBC on 24/10/2009 where he noted that German for instance started from a dip of 6.7% of National Income while Japan saw a contraction of 8.4% and thus, an indication of a quarterly rise by 0.2%-0.3% does not imply in anyway that their economies have recovered. Having reflected the actions of the various governments, I tend to think that approach of both Germany and France is fairly slow and gradual, but without the kind of “ammunition” like what Gordon Brown and Alistair has done to show consistent economic direction which has also been supported by Melvyn King of BOE and MPC, the foundation will be much stronger to grow. Many analysts now predict and concurs with Gordon Brown that UK will recover strongly during the Christmas run.

Reuter : http://uk.reuters.com/article/idUKTRE59O0UF20091025 (25/10/2009)notes the Chief Secretary to the Treasury, Liam Byrne acknowledged that a lot of money has been spent and record budget deficit failed to drag the economy out of recession and argued against cutting back on what has been done to support the economy. He when on to support a prediction of growth by the end of the year and especially for next year with phasing out of stimulus put in place. I tend to agree with his argument. Over the past couple of days, there have been quite a number of positive news from John Lewis, BSkyB, HMV, Acadia, Dabenham, retail sales of 2.8% Year-on-Year September 09, car industry decline easing and others.

BBC News: http://news.bbc.co.uk/1/hi/business/3197610.stm (16/10/2009). I discovered this very interesting article on the Office of National Statistics who denied errors in calculating vital economic data when they revised the July’s GDP from 0.3% to 0.6%. Melvyn King also argued that the statistical fog created were unhelpful to the measure of UK economic. I also noted an article produced on the 23/10/2009 by Stephanie Flanders who criticised ONS not having complete data when producing information about the UK economy and as such I question the reliability of the information for the prediction. In addition, Ben Broadbent, of Goldman Sachs also claimed that ONS was understating the UK economy. He quoted "Do today's data tell us anything about what is really going on in the economy?” I tend to agree, for the fact that ONS often revises their estimates upwards or downwards and as such the quarterly historical statistics may be unreliable. I also question how relevant these indicators are at fully comprehending the overall state of the UK economy. While ONS utilises scientific basis for calculating the economic performance, I am doubtful that they fully reflect the true state of the economy. I cannot support ONS claim that they produce information the earliest amongst bodies within the EU zone and is based on the best prediction at the time of publication. Question is, if reliable estimates are difficult to achieve through early publication, should they wait for a longer period of time, before publishing since reliance on models and statistical estimates utilising unfounded historical relationship may be worthless.

In conclusion, I am of the opinion that the UK economy is actually showing a gradual but clear route to recovery. A lot can be questioned on the negative publicity of the press and surprising how the business community react to such data. Also, there are plenty of reason for anyone to doubt ONS estimates especially with many companies and also, other economic indicators including unemployment, CBI and other reputable agencies/associations pointing to a recovery.

Is the Weaker Pound the key to UK Economic Recovery!

FT : (http://www.ft.com/cms/s/0/b8c92972-a8ef-11de-b8bd-00144feabdc0.html?ftcamp=rss&nclick_check=1)
Currency traders took comments from Mervyn King, governor of the Bank of England that the central bank was comfortable with a weaker pound, led to a sell off for the Sterling which dropped to a fresh five-month low against the euro. Mr King commented that the sterling’s fall was “helpful” in rebalancing the UK economy since a fall in the exchange rate will support a shift of resources into net exports that compete with imports and help to reduce the trade deficit. Economics explain that if a currency such as the sterling weakens, export becomes cheaper relative to more expensive imports and thus, theoretically, more goods/services would be exported while expensive import would make consumers less excited about imports. However, Ulrich Leuchtmann at Commerzbank noted that playing down the sterling as a new tool to kick-start the economy, was dangerous as he noted that BOE was “playing with fire”. He quoted “It is usually quite easy for a central bank to weaken its own currency but much more difficult to stabilise it again,” he said. The problem was further exacerbated by the news that business confidence in Germany was recovering pushing € to greater heights against the sterling. (Germany’s Ifo index rose for a sixth consecutive month). When reading the article, one realises that the article is written very one sided. The emphasis by the author is heavily laid on the positive effects of the weak pound rather than explaining why a weak pound could be bad.


Telegraph (http://www.telegraph.co.uk/finance/currency/6234980/Weak-pound-is-permanent--economists-warn.html):
In this article, it noted that the high level of national debt, smaller financial services contribution and the efforts made to rebalance the UK economy will see a long-term weakness in sterling. Most economist believe that this weakness is here to stay for a long time including Erik Britton, Fathom Consulting, Paul Robson and currency strategist with RBS. They anticipate that the weaker pound should see it approaching parity to the € in the foreseeable future. Mr Britton said concerns over the “public finances could drive the pound down beyond the level required for a rebalancing of the economy.” What this implies is that with the underlying real economy facing tremendous pressures from high bad debts, mounting public debt, imbalances in finances, and thus the desire to spur exports are unlikely to see a balance in the UK economy in the future. Again this article is very bias, painting a very black picture, which I have found to be the most popular tone in this news paper.

Bloomberg : (http://www.hurriyetdailynews.com/n.php?n=pound-crisis-a-risk-hsbc-economist-warns-2009-10-16 ) in an article “Pound crisis a risk, HSBC” yesterday (16/10) noted by Stephen King, HSBC Holdings Chief Economist that Britain is likely to face a currency crisis after policy makers allowed the pound to become “seriously undermined, with the sterling touching a four-month low against the dollar in September 2009 after Bank of England Governor Mervyn King remark. He concurred with Erik Britton, Fathom Consulting (Telegraph article above) that a small fall can turn into a very large fall, there is definitely a danger. Bloomberg, as always very easy to read and accounting for both negative and positive effects.


To assess how the weaker pound has benefited the exports, a number of articles have been extracted from various relevant sources.
BBC(http://news.bbc.co.uk/1/hi/business/8260487.stm)
The BBC article “Growth in UK retail sales stalls” notes that despite the government efforts to increase money supply, in addition to allowing pound to weaken, consumers are extremely cautious and it cast doubt over the currency picture as well. There were signs of growth in retail (1.3%), food(0.7%) and mail order(1.2%) but all non food and household goods showed declines in August 09. The article concluded that it did not appear to suggest that the weaker sterling has improved export orders. Like the telegraph this article again is very negative towards the future outlook, despite the weak pound perhaps having a positive effect on exports.


This is Money website (http://www.thisismoney.co.uk/exchange-rates) noted 13/10/2009 in an article “Exchange rates: What next for the pound” that the weaknesses of sterling is a major issue for most businesses and households. As the pound has dropped in value against other major currencies like the dollar and euro, travelling abroad has become much more expensive. Imported goods have caused inflation on basic prices for British firms and consumers. On the other hand, UK exporters have welcomed the weaker pound as it makes their goods cheaper to foreign markets. This article for me was very helpful in grasping the whole situation, on par with Bloomberg.

Looking at all these articles in conclusion, there are diverse views from the recent decision by Melvyn King’s recent announcement about the sterling and while it does not deny the impact of this fiscal initiative, there are underlying concern whether the real economy can cope with the scale and size of the various BOE policy initiatives towards economic recovery.

Is the UK government spending its way out of recession, the correct move!

Is the UK government spending its way out of recession, the correct move!

FT(http://www.ft.com/cms/s/0/bbb07600-b681-11de-8a28-00144feab49a.html):
In recent months, a number of key economists have produced contradicting argument about t he appropriateness of government spending to prevent the UK economy from falling into the brinks of an economic “slump”. An invective exchange between Paul Krugman (officially known as “the Nobel prize-winning Paul Krugman”) of Princeton and the New York Times, and John Cochrane of the University of Chicago have developed into two schools of toughts. The first, a pro Keynesian approach, overarching macroeconomic analysis, questioning markets efficiency and supports government intervention to help pull the world out of recession. The second, whose macroeconomic conclusions are closely rooted in microeconomics, emphasised on greater trust on the markets to correct itself.

The Guardian : http://www.guardian.co.uk/business/2009/oct/11/budget-deficit-reduce-osborne-darling-conference
Reviewing some of the politics that took place last week we see a similar debate between the Conservatives who appear to be pro-market efficiency by promoting spending cuts. George Osborne, as shadow counsellor unveiled measures claimed to save £7 billion a year by freezing the pay of five million public sector workers in 2011, while the bulk of the rest would come from that old chestnut beloved of politicians – efficiency savings in Whitehall. He further noted that the rich have to share the burden of the spending cuts and tax rises that are needed to bring the public finances – the fastest-deteriorating of any major economy – back into line such as through the 50% new tax rates planned. While these initiatives are intended to put national debt back to normal levels, the Institute for Fiscal Studies sees the national debt peaking at close to 80% of GDP by 2015 – up from 40% last year and 30% in 2000 – and not returning to 40% until 2030.

The Telegraph http://www.telegraph.co.uk/news/newstopics/politics/gordon-brown/6284662/Gordon-Brown-warns-against-new-age-of-austerity.html
The Telegraph noted an interview by Mr Brown dismissing David Cameron’s Tories as “pessimists” whose plans for the biggest cuts in public spending for 30 years are a “recipe for high unemployment”. He notes that “If you have a growth policy for Britain, get unemployment down, get the economy moving forward, then Britain can have up-growth”. Gordon further noted that the Tories’ plans for public sector cuts would prolong the recession, he says, with tens of thousands of young people unable to find work.
Cutting out the politics from the debate, it would seem that both the Labour and Tories make their case consistent with the pro Keynesian and market efficiency principles as noted above.
Telegraph : http://www.telegraph.co.uk/news/newstopics/politics/conservative/georgeosborne/6224723/Tory-public-spending-cuts-could-push-unemployment-to-5-million.html
In a recent writing reported by the Telegraph, Professor David Blanchflower, a labour market expert, who is professor of economics at Dartmouth College in the USA and served on the MPC until June this year, told the New Statesman: "Unemployment is going to continue to rise this year and may keep on rising. He attacked the economic plans of George Osborne, the shadow chancellor, claiming they would create a "lost generation" of workers. He said that any cuts in public spending could force unemployment up from its current 2.5 million to four million over the coming years. But in a message aimed directly at Mr Osborne, he warned that his plan for accelerated action to bring down the £175 billion state deficit would force joblessness up further. He also disagreed with Gordon Brown recent announcement that some cuts are inevitable once recovery is in place, by arguing that any such actions should be deferred until at least 2012. Professor Blanchflower warned that "If spending cuts are made too early and the monetary and fiscal stimuli are withdrawn, unemployment could easily reach four million. "If large numbers of public sector workers, perhaps as many as a million, are made redundant and there are substantial cuts in public spending in 2010, as proposed by some in the Conservative Party, five million unemployed or more is not inconceivable. Professor Blanchflower referred to the mistakes of the 1930s, by assuming a recovery is taking place and then cutting spending and raising interest rates too early. This gave rise to a decade-long depression.
Thus, the debate on the appropriateness of extending and maintaining government spending appear to be clouded by political agendas of the respective parties, whether it is the Labour or Conservative.
However, there has been some level of support to the government Keynesian approach as increased spending should lead to improved consumption, increased money supply and in turn, naturally result in increased consumption. It is this consumption which is hoped to be the key driver and “multiplier” for economic growth (http://www.econ.washington.edu/user/cnelson/Chap11.pdf).

German elections

http://www.ft.com/cms/s/0/ed855f80-ab99-11de-9be4-00144feabdc0.html?nclick_check=1

 

http://news.bbc.co.uk/1/hi/world/europe/8277526.stm

 

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=acJ3MSClFL48

 

28^th of September 2009

 

A dream for all German entrepreneurs and big business came true; the new elected government is led in a coalition of Mrs. Merkel representing the CDU and Guido Westerwelle, party leader of the FDP. The new center-right government rather than the apprehensive big coalition makes it easier for the re-elected Angela Merkel to push her ideas through.

Even though the CDU won the elections, it was one of the worst results for them in history. However, this result was not nearly as dreadful as of the former coalition partner SPD, who only managed to get 23%. The most surprising thing however, was the success of the smaller parties, gaining massive percentages.

 

After giving a brief summary of the new situation in Germany, it is interesting to see how the different sources listed above conveyed the same message, in different ways. The financial times for example focuses on the reactions of CEO’s of the 30 biggest German companies. The tone of the author is very upbeat projecting, that the election results bring hope for the German economy, which is the largest in Europe, hence affecting the entire EU. However, the author does not cover the flip side of the situation, as for example how the promises made by the parties can be held.

 

The BBC article on the other hand gives a fairly good overview of the entire situation. It is still written in a bias manner, very pro Angela Merkel. Yet it states more facts than the financial times article.

 

The best-written and most comprehensive article is that of Bloomberg. It is very objective and easy to understand. A very good overview is given of the whole current situation. Furthermore, the author compares past results to current results and discusses issues that arise with the new government.

 

Speaking from a financial viewpoint the elections are the best thing that could happen to Germany. Both the CDU and FDP are supporters of low tax and give incentives to raise business activity. The problem however, that is being discussed at the moment is how will the government be able to cut taxes with a budget deficit. Tax is the highest form of income for a government. Germany is one of the largest exporters in the world and with the potential decrease in tax; this is a greater incentive for SMEs to grow through exports, as they become more competitive offering lower prices. The tax cut that is in discussion is enormous and will mean that companies would not be as cash restricted.

 

On the basis of what has been discussed I would conclude that the election results are possibly the start of a financial upswing for Germany and even more important for Europe. The stock markets also reacted positively to the results of the election, which are further indicators that we might possibly be getting out of the recession. However despite the good news of this week’s elections, Germany may not feel the benefits as fast as desired owing the downward pressure implications of the current global financial crisis.