The UK: Statistics and Economy

Some time ago, I was complaining about the increasing opacity/difficulty in obtaining information about the UK economy, for example with the previously wonderful National Statistics now completely hopeless. As such, I have to offer a big word of thanks to Dr. Tim Morgan of Tullett Prebon, who has made an excellent database of statistics available here, and would also recommend the database to those who are likewise frustrated with finding basic data from the official sites. In practical terms, it means less time looking for information, and more time looking at what the data might mean. This is what Dr. Morgan has to say:

Finding key data on UK issues such as inflation, the economy, spending, taxation and debt can all too often prove time-consuming and baffling. The Tullett Prebon UK Economic & Fiscal Database is designed to contribute to the quality of the public debate by providing all participants with ready access to objective and consistent data.

As a celebration of so much easily accessible information, I will today overload on statistics, and use the statistics as a foundation for a review of the UK economy. First of all the government finances, commencing with a breakdown of revenues (billions):

There are a couple of points of note here; the first is that after the drop that took place when the economic crisis became visible, revenue has been steadily increasing with VAT revenue growth particularly pronounced. A commentator recently suggested that the deficit growth was due to a collapse in revenue, but we can see that this only explains a small element of the deficit. With regards to collecting revenues, I propose a more open, efficient and transparent system, and a system that will also reduce costs and distortions in behaviour. For example, I propose the abolition of all corporation tax, and a flat income tax. Since writing the post on reform, I have identified some problems with the proposal, but still hold with the principles (I may update the post if I have some time).

Below, we have spending (£billions):

I don't think any reader of this blog will be unaware of the growing problems of financing pensions and health with an ageing population. I have often spoken about the necessity of priority; that the government needs to make some hard choices between where an ultimately limited amount of resource might go. I have also argued that there are ways of cutting the expenditure of government whilst also maintaining provision of services and safety nets. For example, as one of the more controversial suggestions, I propose that welfare becomes an interest free loan with a finite duration and amount. It is a system that would see the welfare share of spending fall, albeit that it would increase government borrowing in the short term. It is a return to the principle of welfare; that it is a safety net. If you look at the links at the top right of the page, you will find solutions to some other areas of spending. I chose the area chart format as they give a good picture of direction of spending and income, but the overview is better represented through a bar chart (billions, at current values):

It does not look very pretty overall. In fact, it look downright ugly. We then have to ask what this is achieving. How is the UK economy really doing? This is unemployment during massive credit expansion:

In this figure, we can see the impact of the boom, and the appearance of the economic crisis is vivid. When looking at the chart, when looking at the fall in unemployment, it needs to be considered in relation to debt, both government (see above) and private:

It is very apparent that debt growth was masking underlying problems in the UK economy. The second chart perhaps is more scary than it should be. We need to remember that the massive increase in aggregate debt took place during a period of high immigration; the massive expansion of borrowing and the activity that it generated had less impact upon unemployment as it also coincided with high immigration levels. This is from the ONS:

And this reflects in the number in employment:

In these charts, we can see that the rapid credit expansion did dent the unemployment statistics as much as would be expected, as the size of the workforce was also increasing, with significant immigration accompanying the credit boom. The really interesting part is to see what all of these people were actually doing:

Perhaps the most notable point in this, is the increasing size of financial intermediation. Although the figures only go to to 2010, we can see the expansion and subsequent contraction of areas that would be associated with a credit boom; wholesale and retail, real estate. Somewhat surprising is that hotel and restaurants did not see greater expansion. Financial intermediation by contrast, has grown and grown, and (at least as far as these figures go) has not yet started to contract, but I believe that this is now taking place from various news stories (and see below). I took a look at the 2007 SIC codes, to get some sense of what the high expansion in 'all other' means, and examples include legal and accounting, management consultancy, scientific research, R&D, Market Research, rental and leasing of machinery, recruitment consultancy, security services, administrative support services etc. In other words, some of these activities might be associated closely with credit expansion, and other not. Manufacturing is notably flat, as are the primary commodity sectors. Although the chart given above is helpful, it does not give an indication of actual employment, and I dug out some figures from ONS, and created the following (key is given underneath):

A = Agriculture, forestry & fishing, B = Mining and Quarrying, C = Manufacturing, D = Electricity, gas, steam & air conditioning supply, E = Water supply, sewerage etc., F = Construction, G = Wholesale, retail, motor trades, H = Transport and Storage, I = Accommodation and food, J = Information and Communication, K = Financial and Insurance, L = Real Estate, M = Professional and Technical Services, N = Admin and Support Services, O = Public admin, defence and compulsory social security, P = Education, Q = Human Health and social work, R = Arts, entertainment and rec, S = All other services.

The stand outs are the decline in manufacturing employment, Construction, Real Estate, and Retail, albeit that there is something of an uptick in the latter. Also notable is that the numbers working for the state appears to be in decline, but we need to consider this against the increase in 'All other' in the earlier chart of GVA and the increase in Professional Services in this chart; it may be that there is displacement going on here..... Another stand out is the increase in Q, Human Health and Social Work, which now seems to be reversing. A real curiosity is the growth in in D & E, which covers utilities; for E this can be explained by the rejuvenation of infrastructure being undertaken by the water companies (as a guess), but the increase in numbers for electricity is more of a puzzle. As discussed earlier, finance and insurance sees the numbers reducing, which is not apparent in the GVA chart. However, whilst this paints a picture of the post economic crisis, more interesting is to look at what has taken place whilst the world economy restructured in response to the entry of the emerging economies into the system, so I have added December 2000 to the chart, with the label of 'Series 6'. I have placed it next to the 2011 figures to make the changes more apparent.

Manufacturing is startling, even though we have long known this to be the case. For construction, there is still have a way to go before reaching pre-boom numbers, and any reversal of credit growth will mean this sector will shrink even further than pre-boom numbers. If we look at retail now in comparison with unsecured debt now and in 2000 (see earlier chart), the picture is mixed. In contrast to the more recent picture, accommodation and food, however, appears to be an area that may have some contraction if credit growth slows, but there is a question of whether people will forgo retail to continue to enjoy these services, which is a different question, and might mean contraction in retail. In other words, how will disposable income be split between these two sectors if credit expansion stops. Real estate activities still seems to over-large in numbers employed, and still has a way to go down. An offset here is that there are reports of inwards investment into UK real estate, with buyers considering the UK a safe haven. In other words, the sector may yet have 'legs', but my guess is that it is unlikely to last too long.

I have already discussed professional services, and the picture here may be seen as supporting the point about displacement (also see N, Admin support, which may be the same question). However, when looking at export figures, these services appear to have grown, so it is hard to make sense of the figures when aggregated. Education (P) is a real standout for growth in employment. It would be interesting to see how much of this growth is in the tertiary sector, which would reflect the government goals of expanding tertiary education, and also the increase in numbers of overseas students. Whether overseas students will continue to want a UK education is a question that is debatable, as questions are being raised about educational quality (beyond the scope of this post). Finally, we come to another huge standout; health (Q). This stands as an exemplar of the hard choices being confronted by government. In simple terms, each additional person employed in the health system is one less person with potential to be employed in underlying wealth generating activity in the wider economy. And the numbers are going to keep on growing as the population ages. Much more could be said on this subject, but I will leave this open for the moment (at risk of comments that point out that it is not as simple point as I make it). 

 We now come to wages. Below are some key figures for wages and inflation:

I have titled the chart 'getting poorer', as this is the picture it paints. You need to consider this in light of the ongoing massive borrow and spend of government, and the dubious activity of printing money. Also, you need to consider that the indices for inflation are questionable, and that even if accepting the indices in principle, the impact upon individual households is variable. If we really want to understand something about the underlying nature of the economy, the devil is in the detail (sorry for the messy chart, but it is readable). I have gone a bit further back than the chart above, and this is because of the fascinating story of consumer durables.

You will note how there was significant deflation in the price of consumer durables, which we can safely say reflects the entry of countries like China into the world economy. We can see the peaks in energy prices, and the fall in the same prices as the economic crisis bit home. And now, we see inflation in energy once again; however, this time, the inflation may yet be offset as the global economy teeters (in part driven by higher energy prices), in part by the adoption of fracking. On the other sideof the coin, so called 'green energy' are a potential driver in the UK towards higher electricity prices. The chart below gives annual electricity bills, and it is apparent that they are growing rapidly. It deserves a post in its own right, but there are considerable problems looming for UK electricity supply, and the real cost of 'green' energy is now becoming apparent in Germany (e.g. see here and here)

Higher energy prices, it should be remembered, impact more upon those with lower incomes, and the same can be said of food prices. Income spent on energy is not spent elsewhere. The final point of note is that consumer durables have now started to climb in price. If  we look at the $US exchange rate, which is the currency of trade, we can see something of the reason (£GB - $US).

Other factors that may also having an impact are rising wages in places like China, and rising energy prices. However, if China does slow significantly, it is quite possible that there will again be deflation in consumer durables; as orders in Chinese factories decline, there may be a period of significant discounting as businesses seek to at least contribute something to their fixed costs. However, the trajectory of the £GB may offset this, and there is ongoing money printing policies in the major economies to muddle any idea of future exchange rates. Competitive devaluation through printing money means that UK money printing effects may be neutralised by other countries printing money. In summary, inflation is very likely to continue, but the degree of future inflation is a very open question. There are simply too many variables that might impact upon inflation in the UK, with UK government and central bank policy simply additional influences.

With regards to house prices, they continue to fall in price in inflation adjusted terms, even if headline prices are relatively stable:

More interesting is the house price to earnings ratio, given below:

By historical standards, they are still high. I must however mention that house prices are, in part, being supported by the inwards investment, as discussed earlier, in particular in London. Nevertheless, the current ratio suggests current prices are not as stable as they may appear. The Economist also proposes that UK real estate is overvalued compared with rental value (26%) and income (17%), suggesting that real declines will continue at some stage.

My final chart of the day is one I will copy from a previous post, covers the balance of trade, and comes from the (from ONS):

As I stated in a recent post, it is a good indicator of the long term sustainability of the standard of living within an economy and, again, it is not a very positive picture. 

So how can we add up all of these piles of charts? The first point I would like to make is that we can, in part, see that the economic crisis did NOT start in 2008, but started much earlier. It has been so easy for commentators to blame the 'financial crisis', as it evades the fact that there were changes taking place earlier, and that these were simply hidden under the cloak of massive extension of credit. The UK entered the 'financial crisis' already in a state of economic crisis. When looking at relatively benign inflation in the face of credit expansion, the impact of ongoing deflation driven by cheap labour and cost structures in emerging economies was not accounted for. The very real inflation in house prices was ignored; apparently that was un-worrisome inflation. When I first looked at the UK economy in any depth, it quickly became apparent that the boom years were built upon foundations of credit expansion, and I worried for the future and proposed that people were poorer than they thought. We can now see people becoming poorer in the decline in real standards of living, and the now steady decline in the value of most people's primary asset.

People are becoming poorer in spite of government borrow and spend, which is at astoundingly high levels. When consumers were unable to 'grow' the economy through more debt accumulation, the government tried to 'grow' the economy through debt. Spending tomorrow's income now is not a way to grow an economy, as it will see a shrinkage of disposable income in the future. As it is, private debt is now in a very slight decline. However, this slight decline is more than offset by the massive increase in government borrowing; but incomes still continue to fall. This only serves to illustrate the depth of the economic crisis that confronts the UK. Even whilst borrowing and spending more in aggregate, people were becoming poorer, and unemployment was rising. The UK has not even started to address the crisis that sits metaphorically in front of its nose. It does not take much imagination to see what might happen if the UK was to seriously try to balance its budget. Those £billions of debt generate a large amount of employment. What it does not do is generate underlying wealth; that wealth is generated in the primary commodity industries, manufacturing and the export of services. 

These sectors are the ones that are either sitting on plateaus or in decline. Sure, a flood of money into UK real estate might help tide the UK over for a little longer, but that is surely just another repeat of a bubble. There are still such temporary sticking plasters to cover the gaping wound in the UK economy. What these do not do is increase the ability of the UK to export goods and services, which allow the UK to trade in the goods and services necessary to sustain current standards of living. Quite simply, the UK is unable to compete well enough in world markets to sustain the current standard of living. In this post, I looked at government expenditure, and it is apparent that some expenditure is subject to upwards pressure; health care and pensions. These two expenditures look set to rise, even as the UK faces ongoing competitive pressures. In real terms, it means labour being taken from potentially wealth creating industries, and either being redirected into health care, or labour becoming inactive in increasing numbers. The ability to compete with such shifts in the labour force is a challenge the UK must face, in addition to facing the fiercer competition in the world. The UK is not, of course, alone in such challenges, but faces them whilst already struggling to compete. 

I keep on discussing this, but it does not do harm to say it again. The so-called 'austerity' of the current government is not austerity, but a luxury; a luxury that cannot be afforded. It is spending borrowed money to avoid confronting the real underlying standard of living in the UK. It is storing up trouble in the face of the challenges of shifts in the labour force, and a less forgiving world economy. So what is to be done?

The answer is to start to question what can, and cannot be afforded. My benefits reform is an example of how a principle might survive intact, whilst seeing reduction in cost. The aim is simple; to allow what was intended as a safety net to return to its original purpose. Real reform, the kind of reform that is increasingly necessary, requires that the shackles of historic legacies be thrown off. The benefits system did not start out as it is now; it evolved over time into what it has become. The same can be said of swathes of policy that comprises the foundation of government expenditure. If you look at the UK's tax code, it is possible to see that the (sometimes) good intentions of government after government has evolved into a sinkhole to drain away productive activity. Instead, the UK has a massive and fundamentally unproductive industry with the sole purpose of managing tax. Can the UK really afford to have so much productive capacity dedicated to what, in the end, is a process of collecting x amount of government revenue?

It is these really fundamental questions that must be asked, and asked of every area of government; what must the government do, how can it do what it must do differently and better, and where are the priorities for what government should do? These are the questions that are still not being addressed. In the meantime, the UK is becoming poorer. I see no change to this in current policy; but rather see the opposite outcome, which is an acceleration of the decline in the standard of living. After all, where is the policy to really address the poor and declining performance of the UK economy?

Note: I hope this is not too 'clunky'; comments welcomed on this and all points of the post. I have covered a lot of ground in this, so please point out any errors you may see.

Note 2: Shortly after publication - I am not sure I have made the best use of the data given - a bit like a kid in a sweetshop gorging without pause. Thoughts / comments welcomed.

Oh dear, Prof. Krugman

This is a very short post. This from the Guardian on the ever more odd discussions of Prof. Krugman:

On the day the Nobel prize for economics was announced in Stockholm, a former winner was in London urging the government to ditch the "mad" austerity policy that was keeping the British economy depressed. Paul Krugman joined Jonathan Portes for a debate on whether the government had gone too far, too fast.

In what world is the current level of government spending 'austerity'? It is the oddest idea that can be imagined. The deficit is huge (from the Guardian):


Apparently this is 'austerity'. Or at least according to the ever more unreal Prof. Krugman this is 'austerity'. Nevertheless, his words will be taken seriously by many. He may have won a nobel prize, but that does not make his pronouncements any more sensible than any other of the many economists that failed to recognise the problems in the world economy until they were already in plain sight.

The Pressure on Osborne

George Osborne is undoubtedly under pressure and from two directions; firstly there are those who will be demanding stimuli, and secondly those who will be noting and concerned about the failure to meet the borrowing targets that he set. For the former, I have discussed the flaws in the thinking at length, and will not repeat the arguments here. Instead, I will look at some key indicators for the state of the UK economy.


In reviewing an economy, I consider one of the key elements is the balance of trade. It is a good indication of whether an economy is self-sustaining for its overall standard of living or whether it needs credit to sustain the standard; in simple terms, whether the value of what is being purchased exceeds the value of what you are earning. As ever, the UK current account remains in the red (from the 2012 'Pink Book'), and the balance of trade can be seen below (from ONS):



The trend line is fairly clear. The UK is overall consuming a greater value of goods and services than it sells. If looking at the CBI Industrial Trends Survey, August saw a dire outlook for exports, whilst September saw a less dire outlook. The variability in the sentiment makes a firm position difficult to guage, but overall it is not encouraging. And there is good reason for this, with this from the Economist for the trade weighted exchange rate:

Sterling's is at a 13-month high. This partly reflects the Euro's weakness: the euro area accounts for 49.3% of Britain's trade-weighted exchange rate.

I will take a little aside from the main thrust of this blog, as I have been looking for charts to show absolute cumulative government net debt, and it is something that has become an increasingly frustrating process over time. There are plenty of charts that show debt as a percent of GDP, but no charts that show the same thing as 'money'. I have noticed that, over time, this simple statistic has become ever harder to find. I stumbled on this complaint from Steve Keen's blog, and have to agree:

The UK data source, the Office of National Statistics, is almost impenetrable by comparison—it’s the statistical system that Sir Humphrey Appleby would design. It gives the appearance of accessibility, yet either drowns you in so much data in response to any query that you give up, or which, when you get to what you think you want, returns rubbish.

For example, you’d think following the sequence “Economy—UK Sector Accounts—Financial Assets and Liabilities” would actually take you to something resembling the USA’s Flow of Funds, wouldn’t you?

Guess again. Figure 1 shows what it returns you: no data, no publications, but links to four methodology papers on Investment Trusts. “Well done, Bernard!“

I find it a concern that data that I could readily find when starting this blog becomes ever more difficult to find. Steve Keen's main focus is on global debt bubbles, and his comment reassures me that it is not that I am just not looking in the wrong places.  I have looked in a wide range of sources, but a chart (and/or usable/straightforward figures to make my own) that reports the figures I want is elusive, and becomes ever more elusive as time goes forwards. When starting this blog, the figures were easy to find. The Office for National Statistics was particularly useful. Perhaps it is incompetence, but it seems odd that simple statistics are now so hard to find. Unfortunately, even Steve Keen's site does not give the statistics or charts that I need. This is one of his charts:






As regular readers will know, I do not like the use of GDP, which includes activities of the consumption of debt, thereby making the figures of debt as a percentage of GDP useless. In particular, the more you borrow, the higher the GDP. I would normally expect that the Institute for Fiscal Studies would give transparent figures, but they are also obscure, notably with the figures for national debt suddenly stopping in 2003. However, they do give figures for debt on the basis of 'General government gross debt on a Maastricht basis', and this will have to do. I will confess that I am unsure of the details of how the 'Maastricht basis' is calculated, but have found some basic information here. Nevertheless, this appears to be the best and most reliable figures I can find, and I have converted the figures into the chart below:



The figures for 2012-23 are estimates, and the latest reports on the public finances presumably mean that the year will end higher than shown. The relentless upwards march from the period when the economic crisis became apparent is relentless. Despite so-called austerity, the debt pile is growing. Despite the massive government borrowing and spending, people are getting poorer overall:

The Annual Survey of Hours and Earnings from the Office for National Statistics (ONS) shows that the average gross salary for full-time employees was £26,200 in 2011, an increase of 1.4pc from 2010.

But in the face of CPI inflation rates above 5pc this represents a fall of over 3pc in real terms.

I have argued that the government has stepped in to fill the void in the growth of private debt growth, and this is apparent in the statistics:



From the same source as the chart, the pain that sits under the statistics is apparent, describing the the high levels of personal bankruptcy and debt rescheduling and property repossessions. And for the non-financial corporate sector:








It is not a complicated picture. The UK was booming on credit growth. When the credit growth in the private sector stopped, the government filled in the hole with state borrowing. In doing so, the government has continued the overall debt accumulation, where the UK consumes more than it can earn. But it is still not enough to maintain the standard of living of the average person in the UK. The country is getting poorer right now, and the accumulation of debt means it will be even poorer in the future.

What happens if the government were to really stop borrowing? To actually start to reduce the debt? Again, it is not a complicated picture. Even with the government borrowing, incomes are declining. What happens if that borrowing disappears from the economy? Sure, the UK government can keep borrowing for a little longer; it has been able to despite the underlying problems that are apparent in the UK economy. But for how long can this continue? When is the point when the UK is finally viewed as the bad bet that it actually is. This is a chart from Steve Keen:








How long? That is the question that nags. George Osborne may still have time to address the problems, but maybe not. There are some deep seated questions, and those are about what the real standard of living in the UK would be without debt accumulation. A key question is to ask what the government can really afford to do.

For example, can a system continue that sees large numbers of the UK population non-productive, sitting at home on benefits? How can the long term unemployed be put back into work in a tight labour market? Can the numbers of students going into higher education be sustained, when many graduates go into jobs that do not really require a graduate? Both of these are linked questions; a student at university is not 'unemployed' but might be unemployed if not continuing into higher education. Higher education reduces the numbers of unemployed, but does so at a cost. Is the cost and the education worthwhile; does it really add value to the UK economy overall. I give these thoughts as examples of the complexity of how to figure out what is affordable and trying to rectify the structural problems in the UK economy. The problems of how to transition to a lower cost economy are not easy. Nevertheless, a transition must take place at some stage.

The alternative is just not there. An economy can only sustain itself on debt growth for so long. In particular, there is no global recovery around the corner, a recovery that might (just might) help to lift all boats. The opposite appears to be the case, with red warning lights flashing across the world (see last post). Even were the current world economic situation not to get worse, the UK is already getting poorer and more indebted. I therefore make the same point I have now made for several years. The sooner the UK government really acts to address the problems, the better. The problems have not gone away, are not diminishing, but steadily growing. They may be difficult, the reforms may be complex, but carrying on as before becomes ever less tenable. Hard choices must be made, and they will not be easy and they will see a very tough period for many ordinary people. But that is, in any case, the future.

The UK Economy, the Euro and the Least Ugly Contest

I have, for a while, been focused on the Euro crisis, and I will not be the first to note that, as the UK's largest trading partner, the Euro crisis is set to have an impact upon the UK. It is therefore unsurprising that David Cameron (and also notably Barack Obama) has argued for Germany taking more direct action to support the Euro, in particular as it is Germany that is in the front of the line to pay the bill. Jeremy Warner of the Telegraph speaks for many when he says:

The stand-off got a whole lot worse this week. France and Germany are now in open conflict over the way forward, if indeed there is one. For the UK, already bleeding badly from the after-effects of the financial crisis, the situation could scarcely look more threatening.

 The fiscal consolidation chosen by the Coalition was always likely to have a negative impact on output, at least in the short term. To make it work, the Government needed the following wind of decent growth elsewhere in the world economy. Instead, it’s facing a hurricane. We look set to be broken by the storm.

There are no end of commentators expressing their thanks that the UK is not in the Euro, so I will not add to these. However, in response to the Euro, of particular interest is that Bank of England is yet again likely to go down the road of further quantitative easing (printing money). This from Reuters:

Evidence that both may be needed was sharply underlined by data showing that Britons have been shopping much less and factories getting far fewer orders.

In minutes of its May meeting, the Bank of England reported that while 8 of 9 policymakers voted to end a 325 billion pound round of asset buying to keep interest rates low, they had not closed the door on more.

Separately, Deputy Prime Minister Nick Clegg said it was an "absolute priority" to get credit into the economy and pledged to "massively" amplify what the government was doing in its 20 billion pound credit-easing scheme.

Both echoed a prescription delivered on Tuesday by International Monetary Fund head Christine Lagarde, who urged the central bank to buy more assets - possibly including company bonds and mortgages - and called on the government to find money to boost infrastructure spending.

Longstanding followers of the Bank of England's policy of printing money will undoubtedly recall that the policy was put in place with the justification that it was a unique circumstance that drove the policy. As has now been reported ad infinitum, the Bank of England long ago lost all credibility with regards to their original excuse of using money printing to prevent deflation. It now seems that, whatever might produce headwinds for the UK economy, the printing presses will start rolling. What has become an exceptional policy is now becoming routine policy.

We can see the same phenomenon in the US, Europe and Japan. There are two possible interpretations for the 'routinisation' of printing money; the first is that policy makers actually believe that it works, and the second is that they are now completely bereft of any idea of how to fix the ongoing economic problems.I go with the a mix of these two interpretations. For the former, I am guessing the Bank of England aim is a defensive attempt to pull down the value of sterling, out of fear of the impacts of a strengthening of sterling against the Euro. However, as an offset to this the resultant low interest rate will only encourage further borrowing, with potentially negative impacts upon the current account balance (see later, and chart below for the current account balance from ONS).

I have previously discussed flows of capital as a least ugly contest. Investing is no longer a case of looking for attractive investments, but trying to find the least unattractive.There is a catch, though; whilst investors may look for the least ugly, sometimes it pays for countries to be a little ugly. This pulls down the exchange rate, and this in turn helps to maintain a competitive exchange rate (regular readers may recall my example of Switzerland some time ago). Printing money might help with this, but the problem is that it is becoming a universal solution to trouble; right now, nobody wants their currency to appreciate and competitive devaluations are a real possibility. As it is, the UK economy is looking rather ugly without any further money printing:

The U.K. economy shrank more than initially estimated in the first quarter after construction was revised to show a deeper slump, which may bolster the case for the Bank of England to restart bond purchases.

Gross domestic product fell 0.3 percent, compared with a 0.2 percent decline estimated last month, the Office for National Statistics said today in London. Construction output fell 4.8 percent, the most in three years and more than the 3 percent initially estimated, while services and production were unrevised. Net trade and inventories subtracted from GDP.

I say 'rather ugly', as it must be remembered that this decline is still taking place in an environment of massive fiscal stimulus, with UK  government borrowing and spending supporting the economy at the cost of an anticipated deficit of £120 billion for the year 2012/13. There is no austerity anywhere in sight, and yet the UK economy is showing declining GDP. What is, in fact, taking place, is a slowdown in the rate of borrowing, as can be seen below (from the Guardian).

 

It is notable that this excludes financial interventions, which is the government's 'preferred' measure. More worrying is the cumulative total of debt being accrued, with the UK debt clock providing a graphic representation of the growth in debt.The Daily Mail provides a good summary of the current situation of debt in the UK, and it extends beyond concerns about government debt (I do not usually cite the Mail, but they are using some good sources):

There's also the not-so-small issue of Britain's household consumer debt problem which, in relative terms, is the second worst in the developed world.

They have a point. I checked the latest statistics from the Bank of England, and it sees a slow month on month climb in consumer debt. This helps to explain small increases in consumer spending even whilst real income is in decline. Again, from the Mail:

But there's also a misconception about consumer debt. There's much talk of businesses and households 'deleveraging' - paying off debts.

But in reality, Britons are not paying off what they owe. There were hopeful signs of this happening when mortgage rates fell sharply in 2008 and 2009 - some borrowers used the opportunity to pay extra off their mortgages. But consumers soon returned to form and began borrowing again to spend.

Even the falls there have been are due to banks writing off debts, according to the campaign group Save Our Savers (SOS). It points out that total consumer debt stood at £1,461billion in November 2008 and £1,452 billion in November 2011. But banks wrote off £26.7billion of consumer debt. So excluding the bank write-offs debt actually rose by £18.4billion.

Credit card debt continues to 'run rampant', says SOS, rising from £53.3billion to £56.5 billion over that time even thought an 'extraordinary' £13billion has been written off. Total credit card debt when write-offs have been stripped out has exploded by £16.1billion.

So the clear picture is that debts are not only still rising, by bad consumer debts are also just shifting across to become financial sector company debt which, if recent history is anything to go by, could one day become state debt.

And the projection, is that UK debt is set for another explosion. According to the Office of Budget Responsibility, personal debt will grow by nearly 50 per cent from £1.5trillion today to £2.12trillion by 2015.

More interesting than any individual sector is the overall picture of debt, and the graphic below paints the picture by including government, retail, financial and business debt.

These figures should be a cause for worry in all circumstances, but become even more worrying when seeing the UK balance of trade and current account. This from the ONS:

• The UK’s current account deficit was £15.2 billion in the third quarter of 2011, the highest on record.
• The trade deficit widened to £9.9 billion in the third quarter of 2011, up from £7.2 billion the previous quarter.
• The income surplus was £0.3 billion, the smallest surplus since the fourth quarter of 2000.
• The financial account recorded net inward investment of £22.0 billion during the third quarter of 2011.
• The international investment position recorded UK net liabilities of £245.5 billion at the end of the third quarter 2011

This is a chart of the trade balance from the ONS:

 

 A quote from the explanatory note on the chart is given below:

The trade in goods deficit increased to £27.6 billion in the third quarter of 2011, the highest on record. Exports increased by £0.1 billion to £74.2 billion and imports rose by £2.7 billion to £101.8 billion. Both exports and imports are the highest on record.

In crude terms, UK borrowing and spending is a good way to help other countries export goods and services to the UK, and in particular goods. Sure, it increases activity in the economy, as distribution of the goods and services creates activity. However, this cannot be sustained forever. Whilst this has been the case for many years, there must come a point at which borrowing can go no further, and the earlier chart from the Mail highlights that the UK is now reaching a point where the unsustainable nature of the borrowing is becoming very apparent.

I return now to the question of the Euro crisis. As the situation stands, the situation in the UK has been continuing to deteriorate, despite talk of austerity and living within our means. Borrowing and spending is ongoing, and the UK is still consuming more than it can produce. Nothing has really changed since the onset of the financial crisis, excepting that the total volume of debt has increased, and is increasing. No real reform of the UK has yet taken place and the current account figures tell the real story.

Notwithstanding the lack of substantive action so far, the government appears to be genuinely seeking to reduce the rate of debt accumulation and, if it succeeds, as I have argued many times, this absolutely will see a fall in GDP. I have never accepted the absurd idea of expansionary austerity. However, as the earlier chart of total UK debt shows, austerity is a necessity as debt levels become unsustainable. Again, regular readers will know that I do not accept GDP as representing a useful measure of the economy, as GDP figures include activity from borrowed money. However, many take GDP seriously, and as GDP declines, the UK economy will start to look a little more ugly. In short, even without the Euro crisis, the UK was set to become uglier.

To add to these concerns, we have the accelerating Euro crisis and, on top of this, if the Bank of England prints more money, this will add a little more to the ugly factor, albeit partially offsetting this by possibly (temporarily) shoring up GDP figures. The question that this raises is how the UK will look overall in the least ugly competition. I would argue that, so far, the UK government has managed to convince the world that it is not so ugly and have done so with with the promise of future action. That action is now commencing, and doing so just as a shock is about to hit the UK economy in the form of the Euro crisis. The UK economy, as I have outlined, is in no state for this kind of shock, and the fallout of the Euro crisis will combine with the impact on GDP of genuine moves towards austerity. It is not a pretty picture. The UK may become very ugly.

The only possible offset is how ugly other economies will look as the Euro crisis accelerates, and this might allow for some kind of reprieve. In other words, the confidence in the UK economy will be measured by its relative ugliness to other economies. How ugly those economies will be will only become apparent as the Euro crisis accelerates. Perhaps the UK may yet survive a little longer in the least ugly contest, if only because some of the other contestants are going to become so very, very, ugly. Only time will tell, and whichever way this runs, the UK is heading for some very tough times.

Note 1: I assume here that the Euro crisis will not be resolved. I would never say that a resolution is impossible, but it becomes less and less probable as each day passes.

Note 2: I was hoping to respond to comments, but this took me far longer than anticipated. As such, please accept my apologies.

The Gambler's Roll of the Dice

The news of the day is the latest bout of quantitative easing (printing money) by the Bank of England (BoE). The BoE has the following to say:

The Bank of England’s Monetary Policy Committee today voted to maintain the official Bank Rate paid on commercial bank reserves at 0.5%. The Committee also voted to increase the size of its asset purchase programme, financed by the issuance of central bank reserves, by £50 billion to a total of £325 billion.

In the United Kingdom, the underlying pace of recovery slowed during 2011, with activity falling slightly during the final quarter. Some recent business surveys have painted a more positive picture and asset prices have risen. But the pace of expansion in the United Kingdom’s main export markets has also slowed and concerns remain about the indebtedness and competitiveness of some euro-area countries. A gradual strengthening of output growth later this year should be supported by a gentle recovery in household real incomes as inflation falls, together with the continued stimulus from monetary policy. But the drag from tight credit conditions and the fiscal consolidation together present a headwind. The correspondingly weak outlook for near-term output growth means that a significant margin of economic slack is likely to persist.

CPI inflation has fallen back from its September peak, declining to 4.2% in December. Inflation should continue to fall sharply in the near term, as the increase in VAT in January 2011 drops out of the twelve-month comparison. Inflation is then likely to decline further as the contribution of energy and import prices diminishes, while downward pressure from unemployment and spare capacity continues to restrain domestically generated inflation.

In the light of its most recent economic projections, the Committee judged that the weak near-term growth outlook and associated downward pressure from economic slack meant that, without further monetary stimulus, it was more likely than not that inflation would undershoot the 2% target in the medium term. The Committee therefore voted to increase the size of its programme of asset purchases, financed by the issuance of central bank reserves, by £50 billion to a total of £325 billion. The Committee also voted to maintain Bank Rate at 0.5%. The Committee expects the announced programme of asset purchases to take three months to complete. The scale of the programme will be kept under review.

We are now in a situation in which we can see the following; record lows of interest rates over a sustained period, record government deficit spending and bout after bout of money printing:

 

For money printing, I cannot find a graphical representation to illustrate the scale, but you can find an interactive chart here. In summary, macro-economic tools have been deployed in unprecedented ways to support the UK economy. But....and here is the rub, they are just not working. The end result of this macro-economic stimuli?

Inflation, bouts of recession, a current account balance firmly in the red, and the highest rate of unemployment for 17 years.

 

 

Labour Force Estimates

So, all of the macroeconomic measures are really working? The picture overall is pretty clear. The UK has relatively high inflation, rising unemployment, a struggling economy and relatively high unemployment. In any normal world, this might suggest that the policy that has been enacted is just plain wrong. However, like a gambler who is on a losing streak, the policy makers just keep on throwing the dice in the hope that the situation will turn around. Maybe one more big bet, and I'll make up for the losses......

And the latest bout of QE hits the pensioners who have been sensible enough to save:

Further QE is likely to spell bad news for people set to retire this year as annuity rates plummet, leaving pensioners facing high living costs and low returns on their savings.

Research from financial services company Hargreaves Lansdown found that a 65-year-old man with £100,000 could have bought a level income of £7,855 in July 2008, but someone in the same situation today would only receive an income of £5,923, a drop of just under 25pc.

Dr Ros Altmann, director-general of Saga, said the "short-term stimulus" of QE has "very dangerous long-term consequences".

She said: "Buying gilts is not the best way to stimulate growth - it does, of course, help the banks, but it actually has side-effects that directly damage the economic outlook.

"Having more and more poorer pensioners and forcing companies to put money into their pension schemes, rather than their business operations, is a drag on growth, not a boost."

She said tumbling annuity rates mean that "over a million pensioners will be permanently poorer for the rest of their lives, as they have bought an annuity at rates that have been artificially depressed by the Bank of England".
"The impact of QE on pensions and pensioners will lead to lower growth, so we urge the Bank to consider different ways of using newly created money to try to boost the economy."

Of course, it is not just pensions that are being hit by this latest bout of QE, but savers in general have been hit by high inflation and low interest rates. On the other side of the balance sheet, the debtors and profligate are given an easy ride, with high inflation eroding the value of debt, and low interest rates allowing lower repayment rates.What we have in current policy is a major failure. It is built upon an assumption that stimulating consumer demand through reduction in debt servicing costs and providing low interest rates to companies to allow for expansion will actually help the economy recover. It is apparent that it is not working. In fact, consumers and non-financial companies are reluctant to take on more debt (from Steve Keen):

And consumers are still saving:

Note from the first chart consumer debt remains relatively stable over the last few years, after a period of sustained growth. Consumers are not significantly de-leveraging, but they are not significantly growing their debts. In the second chart, the savings rate soars, but then declines before climbing again. What we are seeing is the conflict between the uncertainty about the future, and policy which is punitive to savers and encouraging debt accumulation.

The most interesting thing about the charts is that it shows that in order for the UK to return to so-called growth, it is necessary for consumers to stop saving and recommence debt growth. Of course, this is not real growth, but might be described as Ersatz growth. Returning to the balance of trade chart, we can see the nature of this Ersatz growth. Consumer debt growth saw a corresponding expansion of the deficit in the current account.What the current punitive policy seeks to do is to increase consumer debt levels, in order to import and distribute more goods and services, with the distribution of the imported goods and services seen as economic growth. Fortunately, so far, consumers have been reluctant to play ball, albeit that debt levels are still relatively high and remain relatively stable.

Money printing is just one element in the arsenal that has been deployed to 'rescue' the economy. The Bank of England just does not seem to understand that this can only lead to further inflation and a corresponding decline in disposable income for pensioners. However, it is not just pensioners that are seeing their disposable income declining, as wages are not keeping up with inflation.

I am afraid that I do not have a link, but I have previously noted that even the BoE accepts that their printing of money was a contributor to inflation, and the BoE has also acknowledged that disposable income has been squeezed between low wage increases and inflation. So why do they persist in the policy of printing money? Even on its own terms, the policy is counter-productive. The answer is that it is a means of keeping government borrowing costs down. As long as there is even a possibility of QE, the market for UK government debt is indirectly supported and when QE takes place that support becomes direct. In this case (yet again), the QE is taking place at a time of high inflation, and despite the requirement of the BoE to keep inflation rates within target. Once again, the QE is being enacted with a promise of a fall in inflation just around the corner. If you look at the chart for inflation and follow the link to the chart for QE, you will see that this is a pattern. In each case, the justification is that a fall in the rate of inflation is just around the corner, and the BoE claims that it is acting to prevent deflation.

It is also notable that as each bout takes place, the justification has come to increasingly include elements that fall outside of the BoE remit; the BoE increasingly justifies its actions on the basis of the general economic situation. The inflation story is increasingly threadbare, so the BoE shifts attention to other justifications.

However, there is a fundamental point here, and I return to my earlier discussion. Does all of this macro-economic stimulus look like it is working? However you might look at it, high inflation, squeezed disposable income, high and growing unemployment, sky-rocketing government debt, and a current account deficit does not appear to be sensible economic policy. It is very clear that the policy is not working. Of course, some would argue for even more QE, even more government expenditure is necessary. This is exactly the approach of the losing gambler. The bets become larger and larger in the hope that the losses from the previous bets can be made good.


There are two elements that are missing from the macroeconomic picture over the last few years. The first missing element is genuine austerity. For all the talk, it is simply non-existent. The government continues to gorge on debt even as the economy remains in dire straits. As I have argued in previous posts, implementation of austerity is necessary, but will see a dramatic shrinkage in GDP. The second missing element is real reform of the structure of the UK economy. I followed the tinkering of benefits reform with considerable interest. It was interesting to see how difficult it was to even tinker with with the system by putting a cap on benefits (e.g. see here). Although there are many ways of measuring average income, the measure just aimed to cap benefits at something approximating average earnings for a working person. Nevertheless, the controversy has raged around the measure (see here for my proposed benefits reform, which is now probably too late to enact).

In other words, the macroeconomic policy is one of continuing to roll the dice, and placing the bets that (somehow) it will all work out. I use this analogy because the whole point of betting is to get rewards without having to really work for them. It is counting on luck, not hard work to achieve a living and/or wealth. This appears to be the underlying approach of government; just keep on betting that there is a solution with no cost, and one that does not involve actually reforming to place the emphasis on the UK earning income. The solutions are not working, but more bets are placed that luck will come in and change everything, despite the evidence to the contrary.

My argument is simple; stop betting higher and higher and get out of the gambling game. Instead, address the underlying problem of the UK's lack of ability to earn the income to which it aspires. It is very simple. The structure of the UK economy is the problem.




Note 1: Sorry for a somewhat rambling post. It was a post that developed as it went along, but I hope that it 'hangs together'.

Note 2: The UK National Statistics used to be a great source of data and charts. A while back they changed the format of their data presentation, and it now takes dogged determination to find anything of value in the site. You have to dig, and dig and dig to find anything. It makes me wonder whether the easy access of data was considered to be problematic......? Curiously, government debt seems to be exclusively expressed in terms of % of GDP, with the OBR in particular preferring to use this presentation. I am sure that with enough time and effort, it would be possible to find the information, but it is very odd how it has become so difficult.

In light of this, I have used a variety of sources for charts, and apologise for not using 'official' charts. Of particular note is the Economics Help site, which provides a wealth of useful charts.