British Growth

June 30, 2009

Guarded optimism has emerged that Britain may be one of the first economies to emerge from recession.  The operative word ought to be guarded, not optimism.

First some facts.  Real GDP plunged 9.3% at a seasonally adjusted annual rate (saar) in the first quarter (most in almost 51 years), 4.9% in the year to 1Q09 (most in at least 61 years), and 6.4% annualized over the past three quarters covering 2H08 and this past winter.  In the first quarter alone, investment and exports sank by 26.9% saar and 25.0% saar, while personal consumption declined 5.0% saar.  A breakdown of the 9.3% annualized drop in GDP finds contributions of 5.3 percentage points (ppts) from investment, 3.2  ppts from consumption and 1.6% from a bigger rundown of inventories.  Net exports and government spending made trivial positive contributions.  The current account deficit narrowed 2.6% but rose a tenth as a percent of GDP (a rapidly shrinking denominator) to 2.5%.  The deficit had amounted to only 0.7% of GDP in the first quarter of 2008.  The GDP price deflator firmed by a small but positive 1.0% last quarter.

All of the above information reported earlier today is a whole quarter obsolete. One reason to think Britain will be among the first wave of recession leavers it that it had among the severest and longest recessions of any advanced economy.  Growth back in 2Q08 was revised into the red (minus 0.2% saar), adding another three months to the downturn’s estimated length thus far.  For another thing, the Bank of England has stimulated monetary policy more aggressively than many other central banks, and sterling depreciation last year sets up the U.K. to benefit from any revival of global demand.  Fiscal policy was loosened substantially, too.  Other data today put consumer confidence at a 14-month high of minus 25 compared to minus 27 in the previous two months and minus 37 in January.  The widely followed Nationwide measure of house prices increased 0.9% in both June and 2Q, the latter being the first quarterly advance in six quarters and the former having blunted on-year house price inflation to its smallest drop in 11 months.  As in the United States, stability in the British housing market will be an essential pre-conditions for sustained recovery.  A continuing worry, however, has to be continuing very weak money and credit growth, which does not appear to have responded to monetary stimulus, spurring talk of a British liquidity gap. That possibility and the extremely depressed final estimates on first-quarter growth raise real doubts.

Copyright Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



Comments are closed.