What's happening to the economy?

Growth: "UK GDP grew by 0.8% between April and June, compared to the previous quarter. Growth of 0.7% had been expected.  This takes the growth rate up to 2.6% and boosts chances that the Bank of England will raise interest rates soon." (BBC)

Inflation: "Consumer Price Index inflation rose to 2.5% from 2.2% in May, well above the government's 2% target." (BBC)

Unemployment: "UK unemployment has hit its highest level for six years, figures from the Office for National Statistics show.  There were 1.65 million people classed as unemployed in the three months to May, an increase of 90,000 on the previous quarter, the ONS said." (BBC)

Trade: "The UK trade gap with the rest of the world hit £6.8bn ($12.41bn), from April's revised number of £5.6bn.  Oil imports rose sharply amid falling production in the UK and moves to increase oil stocks, the Office for National Statistics (ONS) said." (BBC)

Manufacturing: "The UK's manufacturing sector has seen its worst fall in output for more than six months, official figures show.  A decline in production of paper and electrical goods contributed to April's manufacturing output slipping by 0.2%." (BBC)

Consumer borrowing: "Mortgage debt has gone through the £1 trillion level, according to figures from the Bank of England (BOE)... According to the Nationwide, the average house now costs nearly £166,000 with mortgage repayments absorbing 42% of average take home pay.  The BOE figures show that Britons have a further £192bn outstanding on credit cards and other loans, so total personal debt now amounts to £1.199 trillion." (BBC)

Public borrowing: "UK public finances suffered their worst June on record, figures from the Office for National Statistics (ONS) show.  Government borrowing rose to £7.3bn in June from £6.2bn during the same month last year - significantly higher than analysts' forecasts of £6.5bn." (BBC)

Comments

[william]

North Sea production is suppressed by Gord's windfall taxes. Oil companies prefer to invest where the goalposts don't get moved all the time.

Unemployment is caused by higher social costs as expected, even when the economy is buoyant.

[Wat Tyler]

What's happening?

I think that low groaning is the sound of the music stopping. Up to our eyeballs in debt, the public expenditure Express hitting the buffers, competitiveness spiralling down into the sea, housing about to fall off a cliff, and every other mixed metaphor you've ever heard.

Who was it who first pointed out the next election is not one to win?

[Richard]

Personally I'd go with Hayek's Austrian school capital theory. It's not mainstream but there's a pretty strong case for it.

Banks create money via lending. As more money enters the economy, interest rates decrease below their natural level. This leads to malinvestment in the capital goods industries. I say "malinvestment" because these investments aren't genuinely viable - economic signals just make it look like they are. The only way to sustain these dodgy investment projects is to borrow more. Further borrowing and credit creation will lead to more inflation. The alternative is for the banks to stop lending and plunge the economy into a recession. The latter is preferable as it corrects previous investment errors and allows the economy to start from scratch. Unfortunately the cycle will continue to repeat itself until the government introduces a 100% reserve system. Highly unlikely though.

[Adam]

Interest rates going up.

Inflation going up.

Imports going up.

Private borrowing going up.

Public borrowing going up.

All in all, not a good picture.

Firstly, the solution is absolutely not a cut in income tax - with private borrowing where it is you cannot put your eggs in a basket marked "consumer spending".

Secondly, the solution is absolutely not another hike in public spending on health and education in the belief that you can spend your way out of an economic problem.

Rather, Britain needs to be earning more - and the solution to that comes from cutting business taxes in particular corporation tax. As long as the government holds the ring on the public finances and doesn't simultaneously let borrowing go wild (say add on some green taxes), such a way forward should be ok.

[Richard]

http://en.wikipedia.org/wiki/Austrian_Theory_of_the_Business_Cycle

For a better explanation of what I just wrote.

[Chris Palmer]

Wat Tyler, I would agree in that respect that the next election is a good one to lose (a bit like 1992?) The Conservative party must either win by landslide, or lose marginally and allow Labour or Labour and Limps to govern again.

I have written about this on my blog here if you (or others) are interested.

[Og]

Could be right there, Wat. The irony is that the 1992 election would not have been a bad one to lose, though the Welsh Windbag installed with Glenys in Downing Street would have caused a run on sick-bags.

One thing we do know is that Brown has not abolished the business cycle, and his relentless social engineering and client-state creation has reduced the economy's ability to withstand domestic or global downturns. But as Gordon knows (but will never let on that he does), the hard yards won in the 1980s stopped the ship from sinking; you don't have to be a conservative to realise THAT.

[David Belchamber]

To me the most alarming part of the report is:
"Consumer borrowing: "Mortgage debt has gone through the £1 trillion level, according to figures from the Bank of England (BOE)... According to the Nationwide, the average house now costs nearly £166,000 with mortgage repayments absorbing 42% of average take home pay".
John Major longed for a nation "at ease with itself".
That is very difficult to achieve if you (i) have a huge student loan to repay (ii) can't afford to get on the property ladder and (iii) can't afford to start a pension scheme early enough to make a difference.
I would really like to hear the tories offer to do something about the housing market (not make it crash but just dampen it down) which apparently has risen some 200% under Nulab.
Cannot lenders be compelled to taper their lending down over a 5 year period from the present multiples back to 3 or 4 times the proved annual earnings of the borrower?

[sjm]

Ah, but the lovely bit was in the Telegraph, that the economic statistics since 1946 have recently been adjusted, and what do you know? they now demonstrate that everything is actually OK, and within Brown's golden rule - and we all believe that, don't we?

[TomTom]

Hayek's Austrian school capital theory

Most people credit Ludwig Von Mises with The Austrian School.

However Fixed Capital Formation in INdustry is very low - the Govt statistics combined Takeovers and M&A into "Investment" which means with O2, P&O, BAA, etc all having succumbed it shows up as increased investment.

Then we have PFI which shows up as increased Bank Lending Secured, and Insurance Companies investing in Buyout Funds like Permira or Apax while at the same time dumping shares on the Stock Market and making acquisitions cheaper.

We have low wage labour coming in to undercut the minimum wage and East European workers who after 12 months in the Uk will be eligible for Tax Credits, Housing Benefit, etc so we may see Social Security Spending increase but since Gordo reset Benefits as Negative Tax (credits) we can expect Income Tax Take to fall.

Inflation would be higher if housing were still in the index and they did not play around with its components.

Banks create money via lending. As more money enters the economy, interest rates decrease below their natural level.

This is pure Liquidity Preference Theory and Hicksian IS/LM analysis coupled to the Kahn Multiplier and Accelerator.............in fact it is non as if Britain has an Investment Boom leading to increased manufacturing capacity - quite the opposite in fact.

Britain has a typical Asset-price inflation usually associated with Conservative Governments of easy credit boosting property prices; Labour's refinement was to destroy pensions and undermine the FTSE by taxing mobile phone companies on 3G business and thus destroying the only growth story in the economy.

Once the US economy tanks after being hormone-dosed on deficits and arms-spending the housing market will reduce liquidity and credit. If GM merges with Nissan and Renault it will be the start of the great bloodbath as the UAW sees its members return to where they were in the 1920s.

[christina speight]

Wat Tyler, who surely had his head cut off 700 years ago nevertheless has hit the nail on the head!

Richard North's meticulously researched "EUReferendum" blog
http://eureferendum.blogspot.com/
has on Thursday a piece entitled "Conservatives Beware" where he points to 11.6 billion UNFUNDED Defence commitments. Joint-Strike Fighter, Eurofighter [idiot Hesltine landed us with that white elephant], more for the aircraft carriers, 24 Airbus Transport planes, and the remaining Type 45 destroyers. And we are also comitted to the EU's FRES [Future rapid Effects System - 14 billion alone], Nimrods, helicopters.

AND THIS is before our soldiers are given a single decently armoured vehicle, for the lack of which they die!

[Richard]

"Most people credit Ludwig Von Mises with The Austrian School."

I know but Hayek developed the capital theory it and his name tends to be more well known in British circles.

"This is pure Liquidity Preference Theory and Hicksian IS/LM analysis coupled to the Kahn Multiplier and Accelerator............."

I thought it was called the Austrian theory of time preference!

I think the Austrian theory does allow for the possiblity that the new money may go disproportionately to consumers, although this has the negative effect of drawing resources away from capital investment thus undermining growth.

[HF]

How might Frank Field view this?

Growth: "UK GDP grew by 0.8% Growth of 0.7% had been expected. (Frank says that immigration boosts demand for goods and more people = bigger GDP)

Inflation: "Consumer Price Index inflation rose to 2.5%" (Frank says that more people increases demand for goods, raising the cost of goods that are in limited supply)

Unemployment: "UK unemployment has hit its highest level for six years" (Frank says that the large influx of immigration is pushing some UK folk out of the market by undercutting their pay).

Trade: "The UK trade gap with the rest of the world hit £6.8bn. Oil imports rose sharply. (Frank says that with more people comes an increase in demand for oil.)

Manufacturing: "The UK's manufacturing sector has seen its worst fall in output for more than six months..." (Frank says...dont know. HF says that the UK Govt has mad it less attractive to do business in the UK)

Consumer borrowing: "Mortgage debt has gone through the £1 trillion level" (Frank sats that the influx of 1m + people has driven up house prices as demand exceeds supply).

Public borrowing: "UK public finances suffered their worst June on record" (Frank is not sure but HF says that since Gordon has run out of things to tax, Labour's finances are suffering a melt down.)

[David Sergeant]

I read somewhere that calls by Social Workers had increased and, hence, were a contribution to increased GNP which seems to keep going up when logic says it shouldn't.

Apart from wondering if Social Workers really contribute much to GNP, or if they do perhaps longer, ie. less, calls may do more good, my concern is that, as a public sector statistic it's "manipulatable" (e.g. note to Directors of Social Services from Whitehall - an increase of 4% of Social Worker calls is expected next year.). So how many public sector statistics are included in the GNP?

[william]

Companies have been plugging their Gordon Brown created gaps in their pension funds, instead of investing in their businesses, reducing our competitiveness, and shrinking our corporate sector.

Whatever Brown touches turns to dust. Even our gold reserves were sold off at half what they would have been worth today.

After 9 years of Brown, it is amazing we have any economy left at all. British entrepreneurship has built a powerful economy despite him. Now even our best efforts are being crushed on the anvil of the Social Chapter, endless mind-numbing regulation, and non-stop interference and tinkering from Brown.

[Chris Palmer]

A particularly good trick in the public service appears to be this:

The public service will employ temporary staff from agencies to do work. This has a two fold benefit. It appears that public sector employees are less than they are, because these temps are classed as a resource rather than an employee. Secondly, it appears that person is employed (which they are) by a private company, so another person in work.

[Nigel C]

In days gone by we used to get economic news on the TV. Now the economy is going pear shaped its all gone quiet.
Wouldn't it be useful to have some press releases from George Osbourne flagging up these issues?
We need the public to know what shape the economy is in BEFORE we are elected.

[Sean]

I think the statistics show that Britain is experiencing an overextension on consumer borrowing and a general reduction in private sector investment. This is symptomatic of lower interest rates to boost consumer spending, but excessive Government regulation strangling business investment.

Considering that there is a growing deficit, the unemployment rate (in my humble opinion), would originate in the private sector. Under Brown, the public sector has been one of the strongest growing sectors in the British economy but is totally reliant on the private sector. Over the previous nine years, Brown had the ability to expand the public sector because of microeconomic reform of the 1980s and because of the remarkable growth in the housing sector over the past five years. He has done absolutely nothing to ensure that there will be future economic growth.

As everyone knows, economic reform does not stand still but under Gordon Brown there has been no real economic reform since the BoE independence in 1997. This means that the British economy is suffering from assumptions made about it based off the reforms which were working so well nine years ago.

The Tories now are going to have a golden opportunity to attack Labour over this state of affairs. Labour received an economic miracle when they came to power and over the subsequent nine years have squandered it.

[Julian Morrison]

It all worries the heck out of me. It really wouldn't take much of a downturn to push people beyond the limits of their heavy mortgage debt, glut the market with re-posessed houses, crash the housing price and tip most everyone else into negative equity. Implosive recession, with a ten year recovery slope. Ouch.

A market correction is needed, and the longer macroeconomic tinkering puts it off, the further there will be to fall.