Bull and Bear – an optimistic and pessimistic view of investment news. Today’s stories include: UK avoids double dip recession, but the downturn was worse, Upside down logic, Has Ben forgotten his own lesson? UK consumers want tax cuts… well they would wouldn’t they?
UK avoids double dip recession, but the downturn was worse
Double dips, triple dips, and downturn: these are just words. We already know that the UK avoided a triple dip recession and now it turns out that the UK avoided a double dip recession too, but so what?
The ONS put it this way: “GDP growth between Q4 2011 and Q1 2012 has been revised from a fall of 0.1per cent to flat, thereby removing the phenomenon of two consecutive quarters of negative growth.” Last August, the ONS estimated that in Q4 2011 the UK contracted by 0.4 per cent, by 0.3 per cent in Q1 2012, and by 0.5 per cent in Q2 2012. That was a horrible set of stats.
Now it is saying that instead of contracting some 0.7 per cent between Q4 2011 and Q1 2012, as it was saying just under a year ago, the economy grew by 0.0 per cent. That is quite a change.
We warned here at the time that by the time the ONS has finished revising its data, we may find out that the UK didn’t have a double dip recession at all. Well, that is how it has panned out.
That’s good, right?
Well, maybe it is, but the ONS has revised other data too, and now it is saying that the economic downturn in 2008-09 saw 7.2 per cent knocked off GDP, whereas it previously estimated a 6.3 per cent fall.
In Q1 2013, the ONS now estimates that GDP was 3.9 per cent lower than the pre-financial crisis peak in Q1 2008. Previously GDP was estimated to have been 2.6 per cent lower for the same period.
As for the latest quarter, on this occasion the ONS has not changed its mind; it is still saying that the UK grew by 0.3 per cent. But it has provided more data to explain the make-up of GDP. It turns out that households’ saving ratio was estimated to have fallen from 5.9 per cent in Q4 2012, to 4.2 per cent in Q1 2013. This was, in fact, the weakest savings ratio since Q1 2009 when it was 3.4 per cent.
If you want a really bearish take on the data, despite a 4.9 per cent rise in profits, business investment fell by 1.9 per cent, and household incomes fell 1.7 per cent in the first quarter compared to a previously estimated 0.3 per cent decline.
In other words, the UK grew in Q1 despite falling incomes, but only because households saved less.
Upside down logic
‘Phew!’ said the markets yesterday, and went out and bought.
And why were they so happy? Why did the bulls return? Well, it turned out that the US economy did not do as well in Q1 as previously thought. The previous data has the US expanding at 2.4 per cent in the first quarter and on an annualised basis. The data out yesterday has growth running at just 1.8 per cent. The main reason for the fall was revised data on services consumption, which was down from 3.1 to 1.7 per cent growth. And the main reason for the fall in services consumption was declining public spending as the US government – hamstrung as it is by Democrats and Republicans calling for different remedies – goes down the road to austerity, or is that down the road to serfdom?
Okay, let’s run that one past you again. Yesterday the news on the US economy was bad. ‘Yippee!’ said the markets, the Fed may not be quite so quick to slow down its QE after all.
So there you have it. When the news on green shoots in the US is good enough to provide sufficient grass to feed the world’s bulls, and a beaming Ben Bernanke says things are so good that the Fed may (note that – may) start a slow return to normal, the markets go all bearish.
But – and keep this one quiet, lean in closer because we don’t want to spark off a panic – the implications of Q1s fall may be that Q2 does better than analysts have been forecasting. We don’t want that. We don’t want good news in Q2, not a new sighting of green shoots, because the bears really would come into the ascendance if that happened.
Has Ben forgotten his own lesson?
It may be worth pointing out at this point that we are beginning to see some flesh put on some bones. The Fed says QE may be reduced soon, and rates may go up 2015. The markets have reacted in horror, and the bears have wasted no opportunity in pouring derision upon the Fed’s rosy outlook.
To date the bears’ argument has been a tad skeletal, but now at least we are seeing some flesh on the bones.
Fleshy bit number one: yes, the news on jobs has been good, but drill down and look at US employment numbers relative to the population, rather than to those registered as either being employed or looking for work, and things don’t look so good.
In 2007, the ratio of the US population with jobs was 63 per cent; by 2010 it was 58.2 per cent, and now it is 58.6 per cent. This article makes the point well: The Ben Bernanke pre-mature taper blues
The second bit of flesh relates to inflation. There is no sign, not even a hint, of inflation becoming a major issue in the US, so why the plans to ease back on monetary policy?
The UK media’s most bearish high profile commenter – Ambrose Evans-Pritchard from the ‘Telegraph’ – said this morning: “The entire pivot by the Federal Open Market Committee is mystifying, almost amateurish, and risk repeating the errors made by Japan a decade ago, and perhaps repeating a mini 1937 when the Fed lost its nerve and tipped the US economy into a second leg of the Great Depression.” http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/10144451/Risk-of-1937-relapse-as-Fed-gives-up-fight-against-deflation.html
But here is the other side of the argument. How much difference has QE made? The consensus seems to be that it made a big difference in the first place, but its impact on the economy has been waning. Of course it has led to higher asset prices. Is blowing a bubble in asset prices really a good idea?
The real point though, surely, is that the Fed has not said it is definitely going to put the brakes on monetary policy – only if things continue to improve.
Just suppose, the good news on the US economy we have seen this year continues, and employment continues to rise, household debt falls, US consumers get steadily more confident, government borrowing falls, the trickle of news about US companies returning their manufacturing to the US turns into a torrent. Just suppose all this continues, and the Fed does indeed cut back on QE. Are the markets really saying this is reason to sell?
If they are, it probably just about proves that they only care about the short term.
UK consumers want tax cuts… well they would wouldn’t they?
A survey carried out by Markit found that households reckon tax cuts would be the best way to create an economic recovery.
When asked what the government and/or the Bank of England should introduce to encourage faster economic growth, 45 per cent said tax cuts, 33 per cent said incentives to boost government lending, 29 per cent said higher infrastructure spending, 29 per cent also said reduce pace of planned government spending cuts.
Only 8 per cent said the Bank of England should buy more assets.
None said the Bank of England should use QE to buy different assets, or fund investment of entrepreneurs, but then they weren’t asked that question.
But actually the popular answer is telling. Of course people want to see tax cuts – who doesn’t? But the UK public are infected with a virus, called fallacy of composition. See Bubbles: the fallacy of composition and the fallacy of our times
Tax cuts may make us happier, but in current circumstances there is a good chance we will save a big chunk of the money the tax man gives us, and that may mean the pace of recovery slows down.
These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees