British Economic Woes

September 29, 2009

The final second-quarter British national income accounts were published today.  Real GDP contracted 2.3% at an annualized rate,  more than twice as much as the drop in U.S. growth and about four times greater than Euroland’s slide.  Business investment plunged 19.3%, exports sank 5.5% and household consumption fell by 2.4%.  Productive output, service sector output and construction each tumbled 2% or marginally more.  British GDP had performed even worse in the prior three quarters, dropping by an annualized 9.6% in 1Q09, 7.0% in 4Q08 and 3.0% in 3Q08.  The level of GDP was 5.5% below that in 2Q08.

The 12-month change in consumer prices, a rise of 1.6%, is higher than inflation in the United States, Japan, or Euroland, suggesting greater latent inflationary pressure than in other economies.  The fiscal deficit this year will be even greater than America’s.  Bank lending has not been as responsive to substantial monetary easing as Bank of England officials hoped.  The current account deficit nearly tripled last quarter to 3.3% of GDP, its highest relative size in seven quarters. Gordon Brown, whose Labour Party is holding its annual conference this week, runs a lame duck government.

Just over seventeen years ago, sterling’s forced exodus from the European Monetary System was a catalyst for some of the Group of Seven’s fastest growth.  Although a disgrace for the ruling politicians, the steep drop in the pound was a huge economic stimulus.  but in the recent past, sterling weakened 13.0% on a trade-weighted basis during the last 12 months and 23.3% over the last 24 months.  In a weak global economy where trade flows have imploded considerably more sharply than GDP, currency depreciation is not an efficient generator of economic activity

Not everything is so gloomy.  The PMI readings have improved to a combined manufacturing plus services score of 103.8 in August from a 74.6 sum recorded last November, and house prices, as in the United States, show signs of turning upward.  An overall snapshot of the British economy remains dismal, however. Not long ago, analysts were touting the Bank of England as perhaps one of the first central banks that may start reversing its ultra-loose policy stance.  Now it looks like the Bank will need to extend quantitative easing, making it probably one of the last central banks to enact further ease.

Copyright Larry Greenberg 2009.  All rights reserved.  No secondary distribution without express permission.



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