0.1%: Boom, boom!

So that was what it was all about? All that well orchestrated hype, all those well honed briefings concerning the end of the recession, brought forth a mouse of a recovery, the smallest margin possible. Let’s hope the figures are not revised downwards. We know the economy struggled again in January, with a couple of weeks of snow bringing much of the country to a halt. The government must be hoping the next couple of months pick up speed, so the first quarter figures this year do not show an overall reduction again.

The bigger picture is alarming. The economy has fallen 6% from its peak, taking it back to levels of output in 2005. So this long Labour led Parliament has produced a standstill Britain, a UK going nowehere. To bring about this worst ever economic performance for a post war Parliament, the government has doubled the national debt and printed more money than any of its predecessors. Then they want us to say “Thank you” for spending all this money we have not earned, claiming it has made us stronger.

The Conservatives have rightly argued that if we do not start cutting the deficit now interest rates will be driven higher by the markets, and more damage done to the halting recovery of the private sector. They also need to point out that we have a two tier interest rate structure in the UK. Interest rates for small businesses and much of the private sector are already too high. It’s only the banks and the government that enjoy rates related to the notional 0.5% the MPC solemnly sets each month, and then only for very short term borrowing.

As Quantitative easing ends, so you would expect the government’s borrowing rate to rise further. Then the MPC has a simple question to answer. Does it wish to carry on with the fiction that 0.5% is the short term interest rate in the economy, so it can endow banks with a bigger windfall, or does it want to get its rate back in charge of market rates for the rest of the economy, in which case it has be higher.

When the Opposition says we need to cut the deficit to keep or get interest rates down, they are right. There remains the gross distortion of our current interest rate structure to sort out. It has been created by a government that wanted to offer sweetheart deals to the public sector and the banks at the expense of everyone else. They are running out of road for this policy, as the markets will extract a higher price for their excesses.

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21 Comments

  1. Mike Stallard
    Posted January 27, 2010 at 8:58 am | Permalink

    Danny Blanchflower, from Florida, is of the opinion that it would be fatal to cut anything now, especially the public sector because that would prolong the recession. There really seems to be little problem in his mind. All we need is more of the same.
    Here in Wisbech we have a small Church Hall which has been revamped and is now getting quite busy with weight watchers, immigrants and last night Burrrrns Night complete with Piper.
    There are two Receptionists paid for by the government, but one cannot be kept on because she is over 25. Meanwhile we have got a graduate in Accountancy who is also unemployed. She is, somehow, on a grant too.
    What I don't understand is how any of this helps the recovery?
    Down here, in other words, the public sector is blossoming. We even have a brand new painted and refurbished Library.
    So what will the markets think of that?

    • Javelin
      Posted January 27, 2010 at 10:36 am | Permalink

      I heard Danny Blanchflower as well (ex MPC and predictor of doom) reckoned spending was all that was keeping the economy from nose diving. I think he has a point (the economy really is that BAD) that we are on a life support machine. He thinks we should let the private sector recover and when it has to start paying back the debt. If I understand him correctly he is not saying that everything in the garden is rosy and we can afford to spend. What he is saying is nothing is growing in the garden to harvest and until it does we have to borrow money to pay for the groceries.

      That's his opinion. I think if you look at public spending as a crude monolilth where all spending equally benefits the population and ignore disposable income then his view is true. But Government does not work as he believes.

      There are lots and lots of places to cut Government spending. It's in the details as well as the wasteful large projects.

      If Blanchflower is saying that long term private sector recovery is necessary, then he must also be saying that long term public sector investment must be forced to wait. He can't have it both ways. He must surely agree with his own logic that it is better to put a person on the dole than in a highly paid Government job if they are not contributing to the recovery.

      On the final point – people who work for the Government should understand that EVERY Government job is a political appointment and is therefore subject to the political agenda of the prevailing party as well as Government finances. When a new party comes in then the nation has decided on a different strategy for the UK – and that may mean people will lose their jobs. This idea of a job for life in Government is completely wrong.

  2. APL
    Posted January 27, 2010 at 9:05 am | Permalink

    JR: "0.1% ….. brought forth a mouse of a recovery, the smallest margin possible."

    This is not a recovery. Oh, and yesterday I saw Ken Clarke and Mandleson on C4 News yesterday. Really, Clarke is not up to it any more – send him to the Lords for gods sake. I despise the man but he looks a wreck.

    I draw the conclusion the office for National statistics like the Met office like the BBC has been fatally compromised by a decade of Labour.

    JR: "Let’s hope the figures are not revised downwards. "

    Yes, lets hope! But at the same time keep a grip on reality. The figure of 0.1 is easily within the margin of error."

    BBC R4 Today: " The National equality panel.."

    Another Quango for the chopping block.

    Then when you look to the Tory party for a sensible reply, they put up Theresa May who talks absolute twaddle.

  3. Kevin Peat
    Posted January 27, 2010 at 9:07 am | Permalink

    Labour are using delay tactics here – the outcome of this will be:

    – a Labour win at the next election
    – a Tory win at the next election … in which case any cuts that follow will be blamed for stalling the 'recovery'.

    You'll be amazed at how effective the blame-shift will be if the Tories win. Labour supporters still cry "Thatcher did it !" about the state of the country in the '70s.

  4. Ian Jones
    Posted January 27, 2010 at 9:36 am | Permalink

    I think this is the way they are bailing out the banks on the sly, the banks borrow at 0.5% and lend at 5% and the profit goes as capital in the balance sheet. unfortunately nobody told the bankers who are now taking it as bonuses!

    Lets see what happens if they decide to turn off QE and let reality back into the room….. I suspect they will keep printing until inflation gets hold enough to clear down the debts…..

  5. Simon D
    Posted January 27, 2010 at 9:40 am | Permalink

    "A UK going nowhere" – I don't agree. We are going in the wrong direction.

    1. The public sector workforce is out of control and millions are on benefit. There has not been a recession in public sector Britain.
    2. The financial services sector is out of proportion to the rest of the economy.
    3. The government is too dependent on the financial services sector for tax revenue.
    4. There is no credible policy for the future restructuring of the financial services sector and the sale of banks too big to fail – just bluster about bankers' bonuses. Lord Mynors goes on TV at least once a day to tell us about the perfection of the structure of the nationalised banks, which no-one should meddle with. The Government needs the bankers' taxes to throw at the public sector and to pay the interest on its unsustainable borrowing.
    5. None of the three parties is interested in manufacturing or agriculture. These activities are outside the M25 and therefore regarded with contempt by the metropolitan chattering, political and media classes and the Westminster bubble. Manufacturing cuts no ice with BBC producers or left-liberal opinion formers.
    6. Our manufacturing base is so weak that massive devaluation has made little impact on export-led recovery.
    7. Our oil and the tax revenues derived from it are both running out.
    8. Our profligate borrowing is gradually lowering the confidence of international investors in British pounds and British government paper.
    9. Our political institutions are corrupt and sclerotic – they are incapable of delivering the change needed by the economic challenge.
    10. The British public wants to have its cake and eat it. We want top grade public services but not the levels of taxes which we should be paying for our excesses. Still less do we want to swallow the medicine needed for our unsustainable borrowing.

    Who is going to keep us in the standard to which we have become accustomed?

    You can't blame Mr. Brown and Mr. Mandelson. They have to keep the plates spinning on the poles until after the election. Mr. Brown would be crucified in the media if he started cutbacks now. His spin crib sheet talks only of 'investment in public services'.

    None of it adds up. Thank goodness the election is only twelve weeks away.

    • Mike Stallard
      Posted January 27, 2010 at 12:23 pm | Permalink

      Lying at the back of all this is, I suggest, our History.
      In the past our white Anglo-Saxon race was democratic, powerful, the centre of world industry and power. Our Colonial and Civil Services were the model to which other countries aspired. Our armies, in the final analysis, and our magnificent navy conquered and then ruled the world.
      Today, after fifty years of letting go of everything, we still feel that our past will pull us through.
      It has gone.
      We are now at a level of Greece, Spain, Iceland, Italy and Argentina. Turkey's currency collapsed too. What you say is so right. Yet we are still locked into a past that has long gone.
      Unless there is radical and immediate change, we are going to crash.

      • waramess
        Posted January 27, 2010 at 3:25 pm | Permalink

        We will crash and this time we will have a recession because the government cannot keep pouring money into the economy in the hope that the patient will obediently recover when arbitarily taken off the iron lung.

        What infrastructure do we have other than a declining oil and gas industry ?

        You are right: we have been badly governed for far longer than this government has been in power and the politicians think it doesn't matter. It does matter, but until sanity returns we are lost.

        What sort of money would you place on having small government and sound money before it is too late?

      • APL
        Posted January 28, 2010 at 1:50 pm | Permalink

        Mike Stallard: "Today, after fifty years of letting go of everything, we still feel that our past will pull us through. It has gone. "

        I think you are on the right track.

        I also think it odd that the politicians who have been instrumental in trying to make the British ashamed of our history, for example; they always accecentuate our part in the slave trade, but you rarely hear the story or Wilberforce or the campaign to abolish the trade, less the action of the British Navy enforcing the abolition, they always characterise the British Empire as evil but rarely mention its good aspects, they always laude for example the Ottoman Empire yet overlook its repressive actions, you almost never hear of the Armenian genocide, you never hear of the Arab Slave trade in the middle east and Africa which in some quarters it still continues to this day.

        Yet these very same politicians have turned out to be the most bellicose and vicious when invading foreign countries.

        Yes I am thinking of Blair and now Brown.

  6. waramess
    Posted January 27, 2010 at 11:24 am | Permalink

    It is quite depressing that the government have been willing to pawn our tomorrow in order to achieve such a paltry "recovery".

    Government borrowing vast sums of money to create a contrived increase in production and consumption in spite of the fact that there is, without the government stimulus, no underlying increase in production or consumption is hardly a legacy to be proud of.

    When the stimulus stops, for indeed it must at some point, what then?

    Government borrowing has returned the economy to where it was before the recession more or less but that's all. No underlying basis for growth just the same old warts: financial services and housing.

    The risks of now falling back into a recession are vast, with the prospect of higher interest rates, further banking problems and another collapsing housing market

    Even Brown must now see what he has done and must be quite content that he hands this hot potato over to Ossie.

    Ossie has had fair warning from Brown: carry on doing what I have been doing or you will be back in recession. Damned if he does and damned if he doesn't

  7. alan jutson
    Posted January 27, 2010 at 11:44 am | Permalink

    I understand from the newspapers yesterday that the Government is now borrowing £6,000 per second.

    Not sure what this covers, as it probably does still not include PFI schemes, The Civil Service Pension deficit, the State Pension Ponzi Scheme, and a number of other problems we have yet to resolve.

    I have to say I will be surprised if Gordon goes for an election after March/April, as new tax rises will then be hitting the pay slips, and the first quarter of this years results will also have been published.

    But on the plus side he has a chance to try a bit of bribery of the electorate, with yet another Budget where the devil will be in the detail.

    Clearly we need to cut Public expenditure in a big way (Surely even a fool can realise that), and encourage those who are wealth and job generators.

    Gordon had the chance in the good times to initiate and complete large construction projects to improve the infrastructure, and thus the efficiency of the Country by lowering part of its overheads, instead he chose to increase the Country's overheads for everyone, by employing more and more people, to do more and more paperwork, needed with more and more regulation, and more and more complicated tax schemes.

    The sooner we start work on reducing the Country's debt and borrowings, the sooner we reduce the interest on the borrowings, and the sooner we get out of the mess. Any householder that does any sort of budgeting will tell you the same.

    It would be wise for the Government and all Politicians to remind themselves that they do not produce wealth, they just suck out a percentage from those who do, and the higher the percentage, the lower the inclination is to work harder.

  8. wilko
    Posted January 27, 2010 at 1:51 pm | Permalink

    So the official figures say that growth was 0.1%

    Surely 0.1% is well within the margin of error, and practically zero, so it is more fitting to say that the economy was flat rather than that it grew.

    I'm surprised to hear commentators in the media, including Conservative spokesmen, accepting the idea that the figures show that the economy has grown (however little), and that we are out of recession.
    Because surely we don't really know that at all.
    People seem to put a lot of faith in the precision of these official numbers.

    Mr Redwood wrote: "Let’s hope the figures are not revised downwards."

    But I think that what matters is not the figures but what is really happening in the economy. Supposing the figures are revised later to say that the economy shrank by 0.1% instead of grew by that amount, yes it would enable politicians to claim that we are out of recession by the commonly accepted technical definition of the word, but it won't make a practical difference.

  9. Steve Cox
    Posted January 27, 2010 at 3:12 pm | Permalink

    IMHO, Simon Heffer hit the nail on the head this morning in his article in The Telegraph.
    http://www.telegraph.co.uk/comment/columnists/sim

    He summarises his thoughts with:

    "The main lessons of the recession are economic, and about what happens if a nation lives wildly beyond its means."

    What concerns me is that all of the Government, most of the Opposition (I'm sorry to say), the BoE, most economists, commentators and journalists, all seem to believe that it is our God-given right to get back to that end-stage of insanity as quickly as possible. Hurrah, house prices are getting unaffordable again! Yippee, the FTSE is well overpriced again. And so on, depressingly ad infinitum it seems.

    Instead of humbly admitting that as a nation we have been living in a Fool's Paradise this last decade, then rolling up our shirt sleeves, tightening our belts, and settling in to the new reality, we are instead printing money with wild abandon, setting interest rates at penurious levels for savers, thereby encouraging yet more stupidity on the part of the banks and risking a serious run on the pound, and generally refusing to face the truth in this matter. Surely, the seeds of the second dip in this possibly W-shaped recession are already sown (thank you the inept M. King et al), if not the seeds of a second even bigger crisis in the not too distant future. When will the British grow up and realise that you have to work hard to earn a living, it's not some God-given right that we have? There are days, far too many of them recently, when I truly despair of – not for, note – my country.

    BTW, if you thought that last comment was a tad maudling, I advise you to watch the movie 'Eden Lake', which graphically shows the dream paradise society that New Labour has built for us. (It's very violent, though, so don't watch it of you have a weak stomach). The events in Edlington only reinforce the message from this movie, but the truly shocking (and very apt) point is the ending – which I won't spoil for you here.

  10. Brian Tomkinson
    Posted January 27, 2010 at 3:34 pm | Permalink

    JR:"The bigger picture is alarming."

    Most readers of this blog are aware of that and indeed have been saying so ad nauseam. However, as each day goes by the calibre of the arguments presented by politicians of any of the three main parties seems less and less realistic or credible. Far from improving confidence that they know what to do and have a detailed plan of when and how to do it they waffle on trying to score cheap shots against each other. I have no confidence in any of the leaders of any of the parties to sort out this "alarming picture". The economic cycle is playing second fiddle to the political cycle we are told. That tells us all we need to know about why this country is in such an appalling state.

  11. Mark Parker
    Posted January 27, 2010 at 4:23 pm | Permalink

    Someone correct these number if they are wrong, please!

    Our GDP is £1.4 trillion pa, that's £350bn per quarter. GDP grew by 0.1% in Q4 2009 – so that's a measly growth of £350 million in the last 3 months of the year.

    And this £350 million growth was obtained by: 1) Pumping £50bn of QE into the economy in that period, 2) borrowing and spending a deficit £24bn in the public sector, 3) stampeding shoppers with a looming 2.5% VAT rise, 4) handing out £100m car scrappage grants, and of course there was Christmas as well.

    The growth is utterly dwarfed by the stimuli applied to the economy. What would have the "growth" been if there had been a balanced budget and no QE or scrappage?

    And why is the ONS and the government so reluctant to publish the real GDP numbers? Is it because the public would be aghast at how little return we're getting for our spending? Coming out with, "it's +0.1% – rejoice!" is nonsense.

  12. Mark Parker
    Posted January 27, 2010 at 4:29 pm | Permalink

    …and while I'm here: has this 0.1% growth been adjusted for inflation? If not, what is the "growth" number after you've deflated it by last month's CPI number of 2.9%.

    Is this growth a real terms shrinkage?

  13. David Hearnshaw
    Posted January 27, 2010 at 4:50 pm | Permalink

    John – you forgot to mention that the 0.5% rate is a great excuse for the banks and buiding societies to screw savers most royally!

  14. Stuart Fairney
    Posted January 27, 2010 at 5:27 pm | Permalink

    I would just like to say what a fantastic performance George Osborne has given in the media recently; condemning labour failure, offering viable alternatives policies and looking like the man to take tough decisions necessary to balance the books. A man who gives people a reason to vote tory.

    Yep, I would like to say that….

    Instead we have had an increasingly out-of-his-depth novice looking like a sixth-former losing a debating contest he does not understand. Mr Cameron, here’s a thought, rather than sending people off for political re-education if they sensibly question threadbare orthodoxy*, what about employing someone who has had a real job to be Chancellor…

    (* A personal litmus test: if all the front benches agree on something, it’s a really, really bad idea, viz AGW, Iraq, the ERM, no vote on Lisbon, deficit spending, bank bailouts, fiscal stimulus, failing to adequately reform welfare, nationalised health and education, counterfeiting via QE, car scrappage, state funded broadcaster, etc etc)

  15. ikh
    Posted January 27, 2010 at 9:48 pm | Permalink

    John, I agree with most, f not all that you have written in this article. I
    expect that the next quarter's number will be flat or negative due to the
    weather and VAT rising by 2.5%. But this will not be the double dip that I
    am expecting. The double dip will be as a result of the deficit and
    the Q.E. plus the one off ( two off ) bank bailout, The economy has been
    propped up at an unsustainable level.

    Pumping all that money into the economy before it had collapsed to a sustainable
    level simply makes sure that the economy will either stagnate or re-collapse
    once Q.E. is stopped and deficit reduction starts to happen. If Labour get their
    way then this will be forced by the markets either driving up interest rates
    or even by refusing to buy Government debt at all, and causing a run on
    Sterling. This will happen if Labour continues with Q.E. or attempts to
    continue deficit spending at its current levels. The markets *may* hold out
    for a May General Election ( but I would not bet on it ) but a March budget
    could also trigger collapse. If this happens then it will be a repeat of 1976
    and we will again have to call in the IMF to help.

    The Tories need to expect and plan for a second dip and apart from providing
    benefit support for mortgage holders, they should let it happen. If left to free
    fall, it should only last two or three quarters before bouncing. This will
    then leave us it a good position for stable growth and in particular a rapid
    return to the trend growth rate of 2.5%.

    The other essential item is to get the Credit Derivatives Market functioning
    safely and sustainably. This is required to give the banks confidence in lending
    to commerce again. It requires that credit derivatives are traded on a public
    exchange ( such as the London Stock Exchange ) with quarterly reporting of
    default rates. The transparency and liquidity this will give will give the banks
    the confidence they need to lend again as it will greatly increase the
    liquidity of the inter-bank lending market.

    /ikh

    • Mark
      Posted January 28, 2010 at 2:07 am | Permalink

      We managed without credit derivatives before they were invented under the motivation of claiming that credit risk was shuffled off a bank's balance sheet by buying a CDS, thus allowing the bank to expand its loan portfolio, gear up and create a bubble. In practice, the risk accumulated among a small group of counterparties who fell outside the definition of a bank, creating a systemic risk. Mr Geitner is being interviewed by a Congressional panel on the consequences (the AIG bailout which some think amounted to a backdoor bailout of much of Wall St).

      For commercial businesses, CDS are a poor tool for the credit risks they face: few hold the bonds they insure, while investment businesses such as pension funds insure through diversification. Banking has long provided other tools that are better suited to normal business, such as factoring invoices, LCs etc. Banks used to spread risk through syndication of larger loans, with the syndication details published in tombstone adverts – now a CDS substitutes for syndication, so fewer minds evaluate the loan proposal and the risk just moves off regulated balance sheet.

      One of the biggest problems with the derivatives markets is that you only know the positions you have with your counterparties. You have little inkling of their positions in the market as a whole and the counterparty risks they are running, and almost none at all if there is a central counterparty. Using a central counterparty relies on them to understand when a position may be significant for a market participant or for the market as a whole. I've more than once seen a public exchange avert collapse by the narrowest of margins through failure to monitor adequately and act (e.g. SIMEX/Barings, NYMEX/Metalgesellschaft, LME/Hamanaka…), and the tin market actually did collapse disgracefully because governments defaulted on buffer stock obligations. Wider transparency about market positions, as with a shareholder register, provides much better safeguards. Of course, the sovereign risks and largest banks are probably the ones who would fight this most avidly – they prefer their market moves to remain secret.

  16. ManicBeancounter
    Posted January 28, 2010 at 12:45 am | Permalink

    Is it not a mite early to say that we are coming out of recession?
    Growth of 0.1 % means that the economy "grew" by about £1.4bn, after having shrunk by £85bn from the peak eighteen months previously. In that time, the BofE has injected £200bn through quantitative easing and the Treasury has let expenditure run riot. The great risk is that higher interest rates will cause a second dip in a few months. Nearly certain is that living standards will be lower in ten years time than if the government had not been so concerned about doing “whatever it takes”. Further, the stimulus would have been more effective if the government had prudently run a small surplus during the boom years. Something, a Chancellor used to call balancing the budget over a business cycle. Instead we are a great risk of reaching a tipping-point, where even sustained growth will not be enough to stop debt as a percentage of GDP increasing into the distant future. The delays in tackling that issue mean that the pain involved in its eventual confrontation will be all the greater.
    The economy will only be out of recession after two quarters of in excess of 2% annualised growth – the long term growth rate for the UK economy.

  • 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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