NIESR’s optimism was echoed by the Royal Institute of Chartered Surveyors (RICS), which expects house prices to rise this year, in a startling reversal of its forecast that prices would plunge 10pc to 15pc in 2009.From David Wighton, of the Times, we have the following:
A slew of positive economic data and an upbeat trading update from Carpetright – often seen as a bellwether for the economy – prompted analysts to predict the UK could emerge from the recession as early as the third quarter.
Still more convincing, the purchasing managers’ survey of services, the most timely and respected gauge of the economy’s most vital sector, shows expansion for a third month, and at the fastest pace since February last year.
The equivalent manufacturing survey shows that industry is rebounding too, and the fightback is affirmed by official data, with the biggest monthly output jump since October 2007.
Markets seem convinced — the FTSE 100 is up by a third from its lows plumbed at the start of March.
It all appears to be compelling evidence of recovery, does it not?
The truth is that we are witnessing a mirage. My first article for this blog was entitled 'A Funny View of Wealth', and I return in this post to the theme in this (very long) essay. The essay was written before the economic crisis struck in full force and, in the essay, I tried to find the apparent source of wealth in the UK, but found that there was no explanation except for a massive expansion in credit. Output of commodities were in decline, manufacturing output had remained static for many years, and export of services provided no explanation for the massive 'growth' that had apparently taken place in the economy. The remaining explanation was that the UK's growth had been built upon borrowing, and in particular borrowing from overseas.
We can now fast forward two years in time, and I can ask the same questions. Exactly what is the source of the current 'recovery'? Which sector is producing the growth in wealth creation to justify the 'recovery'. Let's start with manufacturing:chart above is the production index from the Office of National Statistics (ONS). It seems that, even with an uptick now, we are now producing significantly less than ten years ago. This is what the index of production covers:
The Index of Production (IoP) measures the volume of production of the manufacturing, mining and quarrying, and energy supply industries, which covered 17.2 per cent of the UK economy in 2005.How the word 'recovery' might be applied to this is very puzzling. With regards to productivity, the picture is as bad, with this from the ONS.
As can be seen here, the UK is not in the midst of any kind of productivity miracle that might explain the sudden recovery.
The other potential source of real growth in an economy is in the exports of services. In the essay at the start of the blog, it was apparent that financial services were at the heart of the growth in services export, and the decline of the sector has been reflected in recent services export figures, with a negative trend appearing in the figures (raw data taken from the ONS here - series IKBB & IKBC & IKBD). Curiously, 2008 did see a moment of increase in the positive balance (in part as a result of an expansion in financial services exports! - see data here), but quarter 1 2009 reversed this. Overall, the picture is one of a continuing positive balance in the export of services, but still with nothing that might offer an explanation of the current 'recovery'. On the latest figures from the ONS, which takes us to Quarter 1 of 2009, there is no explanation for the recovery.
Then there is the overall trade balance, which has seen a shrinking of the deficit, but still an ongoing deficit. This from TradingEconomics:
The trade deficit continues, despite a substantial devaluation of the £GB since the crisis began, such as the decline against the $US (apologies for the poor chart). Devaluation has the effect, for example, of reducing the purchasing power of consumers within a country, and is therefore a real reduction in wealth of the individuals whose income is derived in the currency.
However, it is when we see the current account that the scale of the problem becomes really apparent, with the following chart from TradingEconomics:
If taken together, what we are seeing here is no growth in output from manufacturing that might explain a 'recovery', no growth in the export of services, and an ongoing current account deficit. It is hardly a picture of a 'recovery'. To this happy picture of 'recovery', we can add unemployment, with this from the ONS:
It is worth thinking about the underlying meaning in this chart. The proportion of working age people in employment is falling off a cliff. If people are not working, where is the output in the economy coming from? We know that there is no productivity miracle, so how exactly can an ongoing decline in working people explain a recovery? Where can real increases in output in the economy come from except from either a growth in productivity or a growth of the numbers in the workforce actually in work?
For regular readers, they will be aware of my cynicism about what GDP figures actually show, as they include activity from debt based consumption (see here for a full explanation). However, even this indicator, which potentially massively overstates the positive in an economy, looks like this:
So exactly what is the source of this recovery? Here is a summary of where we are at:
- There is no productivity improvement but a decline
- The number of workers in the workforce is in rapid decline
- Production is below the levels of 1998
- The trade balance of goods and services is negative, the trade in services remains positive but with no growth, and the current account balance is negative. On balance, we are still consuming more than we produce.
- GDP growth, a poor measure that exagerates the positive, is still negative. Even if it were to move to the positive, how much of the activity recorded comes from growth in debt?
So where exactly is the recovery? The indicators given as evidence of recovery are the slight uptick in manufacturing, which I have already dealt with, house price recovery, and the stock market recovery. The recovery proposed appears to the return to price inflation of two asset classes, but with no underlying economic justification for these that might be seen as sustainable.
So where is this 'recovery' coming from? Once again, I return to the theme outlined in 'A Funny View of Wealth'. The only real reason for any signs of 'recovery' is that there is yet another increase in debt. The only real difference this time is that the source of the borrowing is primarily the government, and that borrowing is expanding at a record rate. Again, from the ONS:
And how is the government funding that borrowing? By the Bank of England printing money, which is then used to purchase gilts (UK government bonds). The Bank of England has just announced yet another expansion of the so called 'quantitative easing' (QE - printing money) programme, which is primarily being used to purchase government debt. I have previously shown that the QE purchase of debt is propping up the UK bond market, and that it is the monetization of government debt.
What we are looking at is simply more delusion, more hiding from the underlying dire state of the UK economy. The 'recovery' is founded on printing money and more debt. I will quote myself from an earlier blog post, which in turn quoted an even earlier blog post. It is shocking that nothing has actually changed:
Quite simply, aside from the fact that a failure to fund the deficit would be catastrophic, what kind of 'recovery' is it, if it is being financed by borrowing 13% of GDP?I keep wondering how long this can continue. How long can we delude ourselves that all will be ok if we just keep on borrowing more and more, even as our income declines. I keep on asking myself, 'when will we wake up to reality?'
A long time ago, I made an analogy with a household to explain the absurdity of this notion. A household has been racking up huge debts due to too much expenditure on the 'good things in life', but continues spending. All the time the family's debt is increasing, and then the bad news comes. The wife's job is under threat, and the husband's working hours are being reduced. Their income is declining, but the cost and size of the debt is increasing. They are in deep financial trouble, and are borrowing more and more money in order to keep their lifestyle and also to make payments on previous debt.
It looks like the household is in crisis, and they will soon go bankrupt if they continue their profligate spending. Fortunately, so it seems to our irresponsible family, a visitor comes to their house from 'Dodgy Loan Corporation' and offers them a further and much bigger new loan. They look at the figures, and it appears that, if they accept the loan, the family will be able to continue to live the same lifestyle as they had before. A massive weight lifts off their shoulders, and they live happily ever after.....
We can all (I hope) see the problem in the happy ending. I have not mentioned the prospects for the family's income increasing in the future, and without a massive increase in income, bankruptcy will just be delayed. Sadly, for the family, there is no identifiable prospect of such a massive increase in income in the future, and they are just hoping that 'something will turn up'.