GDP Falls!

Those of you keen eagles will have noticed that GDP figures for 2010Q4 were announced today by the ONS, and the figures contained quite a shock: GDP fell in the last quarter of 2010.

After three quarters of positive growth, analysts had expected a small positive number for GDP growth, but numbers plummeted. There have been many concerns since the Coalition implemented its austerity package that it might plunge the UK into a double dip, and hence those worriers appear to be feeling vindicated in voicing their concerns.

However, there are good arguments for why we might have seen such a contraction: We had lousy weather for most of December! Certainly George Osborne has leapt on this explanation to maintain that austerity remains the right path to take. Construction fell particularly strongly in the period, down 3.3%, supporting this view. It's a rather British response to blame the weather, isn't it?!

Yet December was just one month out of three in the quarter. What happened in the other two months? Growth clearly couldn't have been particularly strong in that period.

Do these figures mean we're definitely heading for a double dip? Of course not. The numbers will still be revised (this is the first estimate based on just a third of the available data), although it is unlikely they will be revised up substantially enough that growth would become positive. And it's just one quarter - the working definition for a recession is two quarters of negative growth.

But it ought to be a concern. We learnt last week about the role government spending plays in aggregate demand (how much we all demand of goods in the economy), and as such it ought not to be surprising that as the government reduces G significantly, aggregate demand falls and growth slows. The government is hoping for a strong longer-term impact rather than any short-term impetus with its austerity - it argues private sector behaviour has long been crowded out by high government spending. Later in term we'll assess in more detail crowding out and we'll be better placed to give an assessment of the likely success of the Coalition's economic strategy.

Strikes Ahead

The TUC (Trade Unions Council) are backing joint strikes if planned Tory Coalition cuts go ahead, it has been announced today.

I generally don't back old Labour, lefty stuff like this: I find unions too militant, and usually too ignorant of economics.  Those of you studying econ101 this coming year will find out exactly why unions often cause more harm than good.

However, they don't necessarily always cause more harm than good, for many reasons.  The first, of course, is when employers are simply wielding disproportionate and unfair power as a single employer of many people.  Collective action on the part of workers can hope to match the employer for bargaining power and strike a better agreement for workers.  Classical economists might complain that this distorts the market value for labour, but does it really?  Is the market value really what employers set for wages, particularly when they wield some kind of market power?  You'll learn about the monopolisation of markets in econ101.

Furthermore, should the cuts go ahead?  There's little doubt that the deficit is very large currently, but is that an excuse to wield the axe left, right and centre, as the Coalition is planning?  Some very interesting analysis can be found by Chris Dillow at a blog called Stumbling and Mumbling that I'm a big fan of: The fact is that no government has the kind of knowledge that the Coalition is talking about using to make these cuts fair because nobody can have that kind of knowledge except God (if he exists*).

So given this, I'm actually sympathetic to the Unions and I hope that collective actions on the part of the masses can force this Coalition to rethink.  Governments can be incredibly arrogant creatures at the best of time; lets see just how arrogant this one will be...

(* - I believe he does. See here if you're interested.)

Robert Skidelsky on Deficit Cutting

Robert Skidelsky is a very prominent economist, not least for his biographies of Keynes.  As you can imagine, he is more Keynesian in his leaning as an economist than some.  Right now, with the austerity of the Coalition and others the flavour of the moment, people are much less inclined towards Keynesian arguments.

The feel now is that we need to cut the deficit - this is the big problem, not the fact we're stuck in an anemic recovery from the recession of 2008-9.  Skidelsky has written this article in Project Syndicate on the issue, and I think the punchline has to be:

Events and common sense drove them to deficit finance in 2009-2010, but they have not abandoned the theory that depressions cannot happen, and that deficits are therefore always harmful (except in war!). So now they vie with each other in their haste to cut off the lifeline that they themselves extended.

100 Days of the Coalition

Today marks 100 days since the Tories and the Lib-Dems agreed to join forces in a coalition government in the aftermath of the inconclusive election back in May.

Naturally, the Coalition is trying to put a positive spin on what it has achieved in 100 days.  Most of this is journalists trying to fill space - August is a nororiously dry time for news stories.

Econ101b teaches about monetary and fiscal policy having time lags for implementation, and we learn that the UK government actually has little power over monetary policy these days, having granted the Bank of England independence in 1997.  Given these long time lags, it is probably quite unrealistic to expect that the Coalition can have had any impact thus far on economic outcomes - at least at the macroeconomic level.

It's trying hard though - and another argument we come across in econ101b can give them some credence for trying to argue they've had an impact thus far: Expectations.

Expectations are powerful things.  Investors decide whether to invest or not based on their expectations.  Expect a downturn, and they won't invest - at least not in physical projects.  Why build a new office block if you expect a prolonged downturn?  Can you know you'll fill it?

A central emphasis when the Coalition began was that bond markets were soon likely to turn on the UK - our debt is too high, and our deficit is too high - as high as Greece!  Such talk is based on expectations: Expectations that the expectations of investors are that the UK will default like Greece.

Much has passed under the water since.  Not least, interest rates on long-term government debt have been falling - i.e. it's been getting cheaper for the UK government to borrow.  Kind of runs against what the Coalition had asserted.  The voices of austerity such as the Coalition have been mocked by various sources, not least Nobel Prizewinner Paul Krugman.  Another Nobel Prizewinner, Joseph Stiglitz, has attacked this panic in the face of financial markets: Who is governing, Robert Skidelsky has asked, is it the government, or is it the financial markets?

Of course it's far too soon to judge the coalition; even if I say bond market rates have fallen, there's no reason why they won't rise in the future.  Other unexpected events may mean that despite the austerity, the UK escapes a recession, and unemployment doesn't rise above 3m - something that looks odds on currently.  And even if we have a recession, it still will be too early to judge the coalition - it may be that the cuts are necessary to secure a longer term prosperity for the UK.  I have my doubts, but this may well be the case...