Why did the Uk economy fall in the second quarter when the USA, Japan, Germany and France did better

The government used to tell us we were best placed of the major economies to weather the “global storms”. The government suggsted we would be first out thanks to the massive public sector “stimulus” administered. They ignored the UK hurricane they had created by their mad monetary and banking policies of the previous ten years.

The second quarter figures tell a different tale. The UK economy continued to fall, falling faster than the USA, falling faster than the stronger major economies which saw some recovery. It is true government consumption rose, thanks to the spending spree and the massive borrowing, which helped the figures for output. Overseas trade improved but little despite the devaluation of last year. The big reason the UK continued to fall was the continued squeeze on the consumer.

The government as always wants to have it both ways. The authorities brought the consumer boom to an abrupt end by their hikes in interest rates and their scarce money policies of 2008-9. They did so presumably because they thought consumers were borrowing too much and the party had to end. They got into a panic late in the day, and slashed interest rates and printed money to try to offset what they had done over the two preceeding years. Meanwhile consumers are taking the hint they gave them earlier, and are busily repaying debt. That means they spend less. All the time people are highly borrowed – as many are – and all the time many fear unemployment – as they do – they will repay more debt than the government now wants and spend less than the government wishes.

One of the reasons people are likely to stay cautious and repay more debt is the likely pattern of interest rates. few consumers believe 0.5% rates. Firstly, we can’t borrow at those rates. If you can get a loan it will be many times base rate. Secondly, most people expect rates to have to go up again. They have been burned by the past interest rate hikes. They realise that given the huge sums the government needs to borrow, higher rates are likely in the medium term.

The government hopes to keep rates down through quantitative easing to see them through to near the election. Once that is out of the way markets are likely to force rates up on government debt, unless sufficient action is taken to rein in the deficit and the borrowing requirement. Markets might do that earlier of the numbers continue to alarm. Meanwhile canny consuemrs will carry on paying off debt, and worrying how long they may keep their job.

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14 Comments

  1. Mike Stallard
    Posted August 31, 2009 at 8:15 am | Permalink

    It was really disheartening to see the film on the News yesterday about once prosperous Japan. So called “young men” – one with grey hair – were lounging on the street corner unemployed and guilty. I know the feeling very well myself and it is not pleasant.
    Meanwhile, in public spaces, there were blue tents with people living in them for years. These were not dossers or immigrants: they were Japanese businessmen who had been sacked.
    When the State starts either collapsing after May 3rd 2010 (Labour) or being reined in hard (Conservatives?), we, too will no doubt face the same thing. Or at least lots of very, very angry Council workers under the placards of their various Unions marching on the streets.
    Oh well, back to the 70s!

  2. Doug
    Posted August 31, 2009 at 8:45 am | Permalink

    Does anyone know how far GDP would have fallen in the last quarter without the print/borrow/spend orgy embarked upon by the government and BOE? (i.e. what was the GDP contraction of the real economy.)

  3. alan jutson
    Posted August 31, 2009 at 9:05 am | Permalink

    I think your comments are correct.

    Gordon said we were best placed because he could, and the lie would take a few months to be exposed, so it bought him some time.

    The next lie is that confidence and the economy is improving, again it will take many months for this to be found out. We may be near the bottom, we may be not, but sure as eggs is eggs things are not getting any better from my perspective, or from those out of work.

    Fujitsu laying off 10% of their workforce.
    Car sales to downturn again when the scrappage scheme runs out of money etc.

    Yes people are paying off debt when they can, yes people are refusing to spend money on non essentials, simply because they wish to strengthen their own financial position should they suffer bad news at work.

    Yes it is actually probably the best time to purchase a major ticket item, prices are unlikely to be as low again, but confidence to spend, is less at the moment than confidence to save. When the position changes we will have the green shoots appearing.

  4. Marcus
    Posted August 31, 2009 at 9:06 am | Permalink

    Hi John,

    So, “…Meanwhile canny consumers will carry on paying off debt, and worrying how long they may keep their job”

    If I press you, is this your advice to all consumers?; pay down debt. Would you go further and recommend individuals and families reduce future borrowing, stop spending on discretionary items and start to save and live within their means?

    While this course of action is my particular personal choice, I fully understand that uk.plc and uk.gov is geared to enabling everyone who can to borrow and spend to get their jam today. The entire recent economic boom has been built on this premise.

    I can see that if the idea of postponing gratification really starts to gain traction and the general economic tempo is permanently reduced, then any possible recovery will be pushed out much further into the future.

    To paraphrase Dick Cheney on a related topic, “conservation may be a sign of personal virtue, but it is not a sufficient basis for a sound, comprehensive energy policy.” similarly, if individuals balance their budgets and rebuild their personal balance sheets, they will break the greater economy as it is currently configured.

    How do you square that circle?

  5. David Gale
    Posted August 31, 2009 at 10:17 am | Permalink

    …and anything that the Conservative Party says or does, that doesn’t involve replacing the 30% of British Manufacturing Industry destroyed under Mrs Thatcher and reducing the burden of the Civil Service, is nothing other than peurile PR.

  6. Demetrius
    Posted August 31, 2009 at 11:43 am | Permalink

    For the ordinary person there are too many unknowns, and too many risks. Anyone in their right mind at the moment will be either reducing or getting out of debt as best they can. Also, in the UK the figures are propped up by the amounts that have gone into the public sector and the money machine. The real economy is in trouble. If I can see this, then so can the markets.

  7. Brian Tomkinson
    Posted August 31, 2009 at 12:56 pm | Permalink

    We’ll have less to spend or save after the fuel duty goes up from midnight by 2p/litre which with VAT is 2.3p/ litre. I hope your party really does know how to sort out this colossal economic mess.

  8. oldrightie
    Posted August 31, 2009 at 2:00 pm | Permalink

    Inflation wil be the result, as always throughout history, of printing money backed only by perceived future earnings. It’s going to be very tough over the next 15 years.

  9. Ian Jones
    Posted August 31, 2009 at 2:28 pm | Permalink

    The fact that Govt spending is out of control means consumers are saving to cover the forthcoming onslaught in taxes as well as interest rate rises. Everyone knows its coming so they are paying off debt or saving!

  10. Lola
    Posted August 31, 2009 at 3:02 pm | Permalink

    There are several observations prompted by this piece.

    Firstly I just do not believe the positive GDP figures from France and Germany. These are the two core Eurozone economies with political elites with more invested in the success of the Euro experiment than anyone else, and hence a lot to gain by this ‘success’. Plus I bet a whole shed load of the alleged ‘growth’ is nothing of the sort – it’ll be down to governments sending money round in circles though things like the scrappage schemes.

    Next, it demonstrates the utter futility of giving our money to the banks. Much better to give us all the equivalent tax rebate which we would then use to repay OUR debts and rebuild OUR balance sheets, or for those who are fortunate to save and invest or even spend.

    And it makes the idea of tax rises on individuals as a means of sorting out all this mess utterly risible. Speaking from my personal knowledge and experience generated by my FS business and other observations it is quite clear that family budgets will not sustain the necessary rise in the price of money AND an increase in taxation.

    Finally it shows how desperately we need to get the State out of the supply of money business, or at the very least find some way to bind all governments to sound money policies.

  11. Frugal Dougal
    Posted August 31, 2009 at 3:24 pm | Permalink

    Answer…because the financial sector is, at the highest levels, administered by eejits?

    The madness still continues. While shopping the other day, my wife dropped into the bank and found that the lady serving her refused to return her card until she’d spoken to the locum manager about “additional services”. So she went in, and was given a very hard sell until she’d accepted a cash ISA – which we already had, with another bank, and couldn’t afford another.

    I might have given the temp something to think about, but in my wife’s defence she didn’t expect to be pulled into GuantĂ namo Bay while doing the shopping.

    Anyway, the regional management were horrified when we wrote to them, and I believe the temp, who worked in a city near Cambridge, was disciplined.

    But it goes to show that the creation of debt is still big business.

    • Lola
      Posted August 31, 2009 at 6:16 pm | Permalink

      If you want to understand how much worse the ‘hard sell’ could become and how the FSMA 2000 and it’s Satan’s Spawn of Quango’s – the FSA, FOS and FSCS are all about nationalisation by regulation read the FSA utterly risible ‘Retail Distribution Review’.

      http://www.fsa.gov.uk/pubs/cp/cp09_18.pdf

      The real worry is that Mark Hoban the Tory FS blokey supports it!

      Never forget that regulation exists to create fear so that it can continue to exist.

  12. no one
    Posted August 31, 2009 at 7:59 pm | Permalink

    yep Fujitsu is laying off 10% of its staff in the UK

    And the final salary pension fund has been closed to new investments

    and at the same time Fujitsu planning to bring in thousands more (people from abroad-ed) to work on their projects

    As confirmed by Roger Gilbert, Fujitsu’s UK CEO to the analysts on Wed 26th

    Are the conservatives going to sit around and say nothing about this?

    There seems to be a trend here, British jobs for (overseas-ed) nationals to butcher Gordons soundbite

  13. Adrian Peirson
    Posted September 2, 2009 at 4:31 pm | Permalink

    It’s very simple, start making things like Cars and ships, growing food, fishing, coining our own money instead of borrowing it, close the borders. but of course Govt will not allow us, we are being brought to our Knees for the Neofuedalistic New World Order, people are going to die because of this unless it is stopped, this is all deliberate.

    http://www.youtube.com/user/campaignforliberty

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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