Growth and inflation

The UK growth rate was disappointing again in the first quarter. Part of that results from the bad January weather. There might be some upwards revision when they get the final figures in, but it is not going to be a great performance. The UK went into recession early, came out late, and is still limping along.

Why are so many people surprised by this? We have a very lopsided economy, thanks to the strategy to print money for the public sector and squeeze the private sector. Allowing the pound to slide has left us exposed to imported inflation. As predicted here, the squeeze on living standards in now intensifying. Wages in the private sector are only going up by around 1% a year, whereas prices are rising by more than 4% a year. From this month, whoever wins the General Election, the squeeze begins on public sector pay as well. This year could see the biggest drop in living standards I can remember, thanks to the policies this government and its monetary and banking authorities are following.

We see the impact on many a High Street, with closed shops and empty properties. We see it in the order books for many private sector companies. We see it in many small and medium sized comapnies, struggling to boost turnover and short of bank finance.

Technically the recession is over, but in practise many are suffering more now than a year ago in the depth of it. Unemployment is too high, growth is feeble and real wages are falling. We need a change of approach to the banks, to monetary policy and to the deficit. This model gives us inflation and poor output at the same time. That used to be called the misery index. Only Labour could call it a recovery, and try to worry people that trying some other approach might “threaten the recovery”.

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35 Comments

  1. Mike Stallard
    Posted April 24, 2010 at 8:37 am | Permalink

    I am working at the moment in our Church Hall which has been converted into a Help Centre with mainly EU and government money. I have not been paid now for two months because the EU hasn't made the burokrazja (paperwork) easy. For each student I have to fill in about 13 pieces of paper and each student (whose English is pretty weak) has to answer very difficult and abstruse questions. For the next course to begin (we have a long waiting list) our Director has to go and beg. So I have been laid off!
    Meanwhile, of course, I shall continue to teach for nowt.
    Meanwhile we have a lot of people straight out of University and School who are on the Dole. They are nice, presentable, smiling, happy. They are sort of parked there to keep the figures down for the election.
    Yesterday, in the crisis of paperwork upon which two permanent jobs (not mine) and the Centre depend, I asked a couple of them to come and help.
    No.
    They were "too busy".
    If you went in, you would see a hive of activity. Computers whirring, soft music beating, chatting pleasantly humming and, sometimes, an errand being run.
    I notice that it is Taddeusz and his wife who clean the toilets and sweep the floors, Sdenka who clears up the office and Adriana and her team of immigrants who cope with the flood of people who come in for help.
    That, according to Mr Brown, is "sustaining the recovery".

  2. alan jutson
    Posted April 24, 2010 at 8:44 am | Permalink

    In real terms we do not have recovery, we are bumping along at the bottom.

    The only good bit of news is that things have not got worse (they have for some).

  3. Stewart Knight M
    Posted April 24, 2010 at 9:34 am | Permalink

    Quite right John, and let's not forget that the growth figures could be revised down, and there are many factors now at play like inflation that may have a very detrimental effect on growth to come.

    BTW: When is David Cameron, or Hague as he failed to do on QT this week, going to nail Brown over the stupid claim that scrapping the rise in NI is taking £6billion out of the economy? I have heard this claim many many times that seems to be resonating, which is why they repeat it ad infinitum, and have never heard it really nailed square on the head except by an audience member of QT.

    If Cameron uses this claim as the basis for a real attack on Brown as being economically incompetent and illiterate with a simple 'on the contrary' and actually call him illiterate, they might nip this in the bud, but it has been allowed to fester.

    .

    • alan jutson
      Posted April 24, 2010 at 7:37 pm | Permalink

      Stewart.

      Yes I was shouting at the screen as well.

      Its such a simple put down that is required as well.

      So MR Brown where do you think this 6 Billion is going.

      Let me tell you:
      Its going into the Workers pockets for then to spend where they like.

      Its going into the Companies cash flow to help them sustain their business.

      Its being taken out of your hands so you cannot increase your spending on your debt.

      Its not being taken out of circulation as you suggest, it is being spent by others, on things they need and each time they spend money they pay an element of tax.

  4. Jonathan
    Posted April 24, 2010 at 9:45 am | Permalink

    And this is the growth that billions have bought us? It’s a good thing we were always best placed to weather the recession otherwise we might have been even slower.
    It's depressing that a large portion of the electorate still believe the lines trotted out by Brown, Darling and Balls; economics and money management should be compulsory subjects at school so people can understand when politicians are lying.

    • ManicBeancounter
      Posted April 24, 2010 at 6:38 pm | Permalink

      Jonathan, you wrote
      "It’s a good thing we were always best placed to weather the recession otherwise we might have been even slower"

      This is not quite right. During the boom years we should have had the budget at least in balance, with debt stable or falling as a % of GDP. But we entered the recession with a structural deficit around 4% of GDP and National Debt Rising.
      Most, if not all of the tax rises or expenditure cuts that are required are to eliminate this structural deficit. The recession impact of falling tax revenues and higher transfer payments will be mostly taken care of by a long and sustained recovery.

      See, for instance,
      http://manicbeancounter.wordpress.com/2010/03/22/

      • Jonathan
        Posted April 24, 2010 at 10:26 pm | Permalink

        Sorry manicbeancounter, it was early in the morning; I was being sarcastic as Gordon and his friend Prudence parted company many years ago.

  5. Bill
    Posted April 24, 2010 at 9:52 am | Permalink

    For several years I had an unsecured, business, overdraft of £50k with my bank. When the banking crisis hit they asked for a personal guarantee for this.
    I refused so the overdraft was pulled.

    I accidentally allowed it to go overdrawn by £1,500 this week and I got a very polite telephone call, asking me to input funds, which I did.

    Now I know this is chicken feed, but if this squeeze on lending is typical of what is being applied across the UK is it any surprise that our exports don’t seem to be kicking in as you would expect when the £ has depreciated?

    This may well be an important factor the Conservatives make more of this in my viewwhen discussing the recovery.

  6. Norman
    Posted April 24, 2010 at 9:59 am | Permalink

    It's almost as though £200bn hasn't been printed in the last year, such is the deafening silence about it in the campaign so far. What will happen next year when the presses stop? I realise you have stated this time and again on your site, higher rates of borrowing and a further squeezing of supply.

    The dodging of this issue makes me wonder whether the Conservatives aren't condemning such insanity because they want to keep the option to run the presses some more when they are in power. Hardly fiscal conservatism.

    Maybe Mr Cameron is keeping his powder dry to deliver a series knock-out blows next Thursday?

    Admittedly, I'd feel a lot more comfortable about it if someone with the calibre of our host was facing up to him.

  7. BillyB
    Posted April 24, 2010 at 10:44 am | Permalink

    My real wages have been falling over the last few years but I wouldn't call it "suffering". We have a good standard of living in this country compared to most other countries. Reserve the word "suffering" for where it actually means something.

    I'm glad you think unemployment is already too high… how many public sector jobs will be chopped in the next Parliament to add to this? I wonder if our party leaders will tell us next week

  8. no one
    Posted April 24, 2010 at 10:50 am | Permalink

    yep and we are still printing work visas for 3rd world nationals like confetti

    doesnt make sense to me

  9. Stronghold Barricade
    Posted April 24, 2010 at 11:02 am | Permalink

    I think you should also add that Labour have effectively removed £163 billion in liquidity from the system over the last year, plus the other deficits they have run during their tenure of office.

    Think how much business in the UK could have benefitted from that liquidity if it had still been available to the private sector to invest in new infrastructure and jobs

  10. Pauper
    Posted April 24, 2010 at 11:18 am | Permalink

    "Technically the recession is over …". I wasn't aware that it had even begun. All that's happened is that the debt has been transferred from private hands to the taxpayer. Not a penny's been paid back.

  11. Richard
    Posted April 24, 2010 at 11:25 am | Permalink

    It would be good if these points were made by Mr Cameron & that very small number of Conservative front benchers who are allowed to appear in the media during this election campaign. I don't understand why the Conservative Party is not putting forward its stronger & more articulate MPs from both front & back benches. Some of the Conservatives appearing in the media at the moment are weak. Time is running out.

  12. Max Van Horn
    Posted April 24, 2010 at 11:46 am | Permalink

    What a strange world we are living in.Can you really put your hand on your heart and say that you trust the governments figures enough to claim that we are coming out of recession.Surely, as some people claim 0.2% is merely a 'rounding error'.If you talk to real business the situation is dire and set to become worse.I cannot think back to a time when I have been so deeply troubled by an election.Cameron has 'bought the farm' on the whole AGW hoax, which is going to finish off whats left of industry.He reneged on the EU in/out referendum; and he's for a 'big society', ie big government.How, as a lifelong conservative can I bring myself to vote for this.I've no choice, and yet I feel very stongly about using my vote.We are on the precipice of irrevocable disaster and there is no one to stop the fall.

    Reply: The idea of the Big society is to have a smaller government – it is about more decisions and responsibilities resting with institutions and people other than central government.

    • THE ESSEX GIRLS
      Posted April 24, 2010 at 7:34 pm | Permalink

      JUST A LOUSY NAME THEN.

      Maybe our site host could do better given his own punchy and relevant constituency slogan?

      • Stuart Fairney
        Posted April 25, 2010 at 3:44 am | Permalink

        I have to agree, if the idea is small government (please God!) then calling it small government would seem to make sense to me. I would bet not 1 in 10 could explain what the rather nebulous concept of "Big Society" actually means. And when voters don't understand your message…..

  13. Rose
    Posted April 24, 2010 at 1:24 pm | Permalink

    I have written to you over the last two years about inflation when it was clearly a-stoking. I thought you far too short term in your judgement then that it was not the problem. Now we are in the slow phase. We should all know that slow inflation invariably leads to quick unless drastic action is taken. The electorate needs to be reminded of this, and that hung parliaments are no different from hung councils. Nothing gets done, other than calculation by the parties on how to exploit the problem at the next poll.

    Reply: I agreed that inflation would rise, as it has done this quarter. I also said it would not get out of control as wages were depressed, unless we have another sterling crash. That depends on controlling the deficit in time.

  14. Kenneth Morton
    Posted April 24, 2010 at 1:36 pm | Permalink

    Poetically, the darkest hour is just before dawn. The latest ONS figures on the economy have been downright depressing, given all the resources that have been deployed to bring about an apparent good news story in time for the election.

    The Misery Index will have to have completely new parameters to measure the depths the country will encounter if Brown and co. retain any semblance of power after May 6th.

    Hopefully, when the recovery begins with dawn in the east on May 7th we will also witness the twilight of the evils of socialism and the Labour Party in the western skies.

  15. THE ESSEX GIRLS
    Posted April 24, 2010 at 1:41 pm | Permalink

    We hope that Brown is nailed on his false use of statistics next Thursday. He regularly uses 5-years figures when he wants to make HIS savings or Tory expenditure appear bigger and 1-year figures when he wants to show the opposite.
    DC must be alert and bounce right back.

    We also are confused about PPF.
    The expenditure on building new schools and hospitals is regularly used by Labour to justify the enormous deficit. Isn’t the truth that most have been financed under PPF so they have neither been paid for nor are even on the balance sheet?
    DC should have to hand the respective percentages financed by direct and PPF methods and be quick to point out that our kids and grandkids will be paying for Brown’s prolifigancy.
    That is a potent argument with voters – just watch the worm turn upwards on those interest & approval meters!

    Reply: Indeed -so many of the new buildings and computer systems were bought on borrowing, and the off balance sheet loans were especially expensive.

    • THE ESSEX GIRLS
      Posted April 24, 2010 at 7:28 pm | Permalink

      Thanks John.

      So there is this valid retort as soon as Brown next crows about Labour's achievements and asserts that the huge budget imbalance is because of 'investment' in building new schools and hospitals.

      We certainly hope to hear DC jump on that one in next Thursday's debate about the economy.

      HOPE YOU'RE ALL TAKING THIS IN UP IN MILLBANK!

      (AND, TORY BOYS, WHILE YOU'RE AT IT DO GO BACK AND READ JR'S CONTRIBUTIONS HERE OVER THE PAST 12 MONTHS FOR A WHOLE RAFT OF FERTILE, READY-TO-USE ECONOMIC MATERIAL!)

  16. Lindsay McDougall
    Posted April 24, 2010 at 2:30 pm | Permalink

    I am surprised that you think that there is any recovery at all. GDP growth in 2009 Q4 was 0.4%, of which half was attributable to a downward revision of 2009 Q3 growth (was the ONS 'got at' by this government). GDP growth was 0.2% in 2010 Q1.

    The UK population is growing at 0.1% per quarter or more, so the corresponding growth of GDP per capita has been 0.3% in 2009 Q3 and 0.1% in 2010 Q1. The latter rate is statistically insignificant.

    In 2010 Q1, VAT went back up and the stamp duty holiday ended. The car scrappage has just ended and in the remainder of 2010 QE and the low base rate will have to end. Any reasonable person would conclude that, with the withdrawal of these stimuli, GDP per capita growth is likely to be approximately zero.

    For a given increase in the money supply, if GDP growth is less than forecast, inflation will be more than forecast. After FYR 2010/11, the Bank of England has forecast growth of getting on for 3.5% and inflation of 2.0%. It's more likely to be the other way round.

    Let's look at living standards. During 18 months, GDP fell 6.0% against trend growth of 2.1% (which is 3.2% in 18 months). Meanwhile in those 6 quarters poulation growth was about 0.6%. So over that 18 month period, GDP per capita fell below the trend line by nearly 10%. When that happens, living standards have to fall.

    The real choice at the election is between a nasty short recession under the Conservatives while the deficit is sorted out, and a nasty long recession under Labour or LibDems while the deficit is NOT sorted out. I define 'recession' in unemployment terms. At least under the Conservatives the nation will have some hope.

  17. The Great Ignored
    Posted April 24, 2010 at 3:02 pm | Permalink

    Will the nationalised banks come good and turn us a profit ?

    • simon
      Posted April 25, 2010 at 10:41 pm | Permalink

      Eventually maybe .

      Only a confidence trick can make it look like it turns us a "profit" any time soon as the money can only have come from taxpayer subsidies and ripping off savers and borrowers with excessive margins .

      Given the taxpayer paid far too much for these assets , it's going to take a long time to break even .

      Don't think we will ever know the true cost to the taxpayer of nationalising these banks , guaranteeing depositors and bailing out the negligent shareholders .

      The country needs competition in the area of banking , not nationalised banks with an unfair commercial advantage .

      Think they should be broken up so the profitable parts can flourish and start paying tax again .

  18. Mark
    Posted April 24, 2010 at 10:53 pm | Permalink

    I commented on the inflation figures the other day when they came out: in summary, RPI now seems to be increasing at around 8% at an annualised rate, so we can expect the formal twelve month figures to continue rising.

    The output figures are interesting: the increase depends entirely on increased output from utilities. Well,well – we had a very cold snap, so they used a lot of extra imported fuel (even though there were some hiccoughs in supply on the Langeled pipeline from Norway. In the mean time, transport was severely disrupted, so both exports and imports were sharply down. We have a strongly negative trade balance in goods, so temporarily this balance appeared to improve, apart from the offset of increased gas and coal imports. Effectively, a reduction in non-energy imports offsets the increased energy imports. The underlying reality is that the economy has not improved but probably has deteriorated again, and that we paid top dollar to overseas suppliers to keep ourselves warm.

  19. Rick
    Posted April 25, 2010 at 1:43 am | Permalink

    yep and we are still printing work visas for 3rd world nationals like confetti

    doesnt make sense to me

    • BillyB
      Posted April 25, 2010 at 10:43 am | Permalink

      says who?

  20. Patrick
    Posted April 25, 2010 at 3:58 am | Permalink

    I am surprised that you think that there is any recovery at all. GDP growth in 2009 Q4 was 0.4%, of which half was attributable to a downward revision of 2009 Q3 growth (was the ONS 'got at' by this government). GDP growth was 0.2% in 2010 Q1.

    The UK population is growing at 0.1% per quarter or more, so the corresponding growth of GDP per capita has been 0.3% in 2009 Q3 and 0.1% in 2010 Q1. The latter rate is statistically insignificant.

    In 2010 Q1, VAT went back up and the stamp duty holiday ended. The car scrappage has just ended and in the remainder of 2010 QE and the low base rate will have to end. Any reasonable person would conclude that, with the withdrawal of these stimuli, GDP per capita growth is likely to be approximately zero.

    For a given increase in the money supply, if GDP growth is less than forecast, inflation will be more than forecast. After FYR 2010/11, the Bank of England has forecast growth of getting on for 3.5% and inflation of 2.0%. It's more likely to be the other way round.

    Let's look at living standards. During 18 months, GDP fell 6.0% against trend growth of 2.1% (which is 3.2% in 18 months). Meanwhile in those 6 quarters poulation growth was about 0.6%. So over that 18 month period, GDP per capita fell below the trend line by nearly 10%. When that happens, living standards have to fall.

    The real choice at the election is between a nasty short recession under the Conservatives while the deficit is sorted out, and a nasty long recession under Labour or LibDems while the deficit is NOT sorted out. I define 'recession' in unemployment terms. At least under the Conservatives the nation will have some hope.

  21. Lindsay McDougall
    Posted April 26, 2010 at 11:07 am | Permalink

    Curious! My comments appear both under my own name and that of Patrick. How did that happen?

  22. Ian
    Posted April 26, 2010 at 11:27 am | Permalink

    I am surprised that you think that there is any recovery at all. GDP growth in 2009 Q4 was 0.4%, of which half was attributable to a downward revision of 2009 Q3 growth (was the ONS 'got at' by this government). GDP growth was 0.2% in 2010 Q1.

    The UK population is growing at 0.1% per quarter or more, so the corresponding growth of GDP per capita has been 0.3% in 2009 Q3 and 0.1% in 2010 Q1. The latter rate is statistically insignificant.

    In 2010 Q1, VAT went back up and the stamp duty holiday ended. The car scrappage has just ended and in the remainder of 2010 QE and the low base rate will have to end. Any reasonable person would conclude that, with the withdrawal of these stimuli, GDP per capita growth is likely to be approximately zero.

    For a given increase in the money supply, if GDP growth is less than forecast, inflation will be more than forecast. After FYR 2010/11, the Bank of England has forecast growth of getting on for 3.5% and inflation of 2.0%. It's more likely to be the other way round.

    Let's look at living standards. During 18 months, GDP fell 6.0% against trend growth of 2.1% (which is 3.2% in 18 months). Meanwhile in those 6 quarters poulation growth was about 0.6%. So over that 18 month period, GDP per capita fell below the trend line by nearly 10%. When that happens, living standards have to fall.

    The real choice at the election is between a nasty short recession under the Conservatives while the deficit is sorted out, and a nasty long recession under Labour or LibDems while the deficit is NOT sorted out. I define 'recession' in unemployment terms. At least under the Conservatives the nation will have some hope.

  23. Patrick
    Posted April 26, 2010 at 3:33 pm | Permalink

    Sorry manicbeancounter, it was early in the morning; I was being sarcastic as Gordon and his friend Prudence parted company many years ago.

  24. Kelly
    Posted April 26, 2010 at 11:27 pm | Permalink

    Stewart.

    Yes I was shouting at the screen as well.

    Its such a simple put down that is required as well.

    So MR Brown where do you think this 6 Billion is going.

    Let me tell you:
    Its going into the Workers pockets for then to spend where they like.

    Its going into the Companies cash flow to help them sustain their business.

    Its being taken out of your hands so you cannot increase your spending on your debt.

    Its not being taken out of circulation as you suggest, it is being spent by others, on things they need and each time they spend money they pay an element of tax.

  25. Jonathan
    Posted April 28, 2010 at 2:05 am | Permalink

    I am surprised that you think that there is any recovery at all. GDP growth in 2009 Q4 was 0.4%, of which half was attributable to a downward revision of 2009 Q3 growth (was the ONS 'got at' by this government). GDP growth was 0.2% in 2010 Q1.

    The UK population is growing at 0.1% per quarter or more, so the corresponding growth of GDP per capita has been 0.3% in 2009 Q3 and 0.1% in 2010 Q1. The latter rate is statistically insignificant.

    In 2010 Q1, VAT went back up and the stamp duty holiday ended. The car scrappage has just ended and in the remainder of 2010 QE and the low base rate will have to end. Any reasonable person would conclude that, with the withdrawal of these stimuli, GDP per capita growth is likely to be approximately zero.

    For a given increase in the money supply, if GDP growth is less than forecast, inflation will be more than forecast. After FYR 2010/11, the Bank of England has forecast growth of getting on for 3.5% and inflation of 2.0%. It's more likely to be the other way round.

    Let's look at living standards. During 18 months, GDP fell 6.0% against trend growth of 2.1% (which is 3.2% in 18 months). Meanwhile in those 6 quarters poulation growth was about 0.6%. So over that 18 month period, GDP per capita fell below the trend line by nearly 10%. When that happens, living standards have to fall.

    The real choice at the election is between a nasty short recession under the Conservatives while the deficit is sorted out, and a nasty long recession under Labour or LibDems while the deficit is NOT sorted out. I define 'recession' in unemployment terms. At least under the Conservatives the nation will have some hope.

  26. Eric
    Posted April 28, 2010 at 3:15 am | Permalink

    I have to agree, if the idea is small government (please God!) then calling it small government would seem to make sense to me. I would bet not 1 in 10 could explain what the rather nebulous concept of "Big Society" actually means. And when voters don't understand your message…..

  27. cheap ghd
    Posted May 7, 2010 at 9:50 am | Permalink

    I have heard this claim many many times that seems to be resonating, which is why they repeat it ad infinitum, and have never heard it really nailed square on the head except by an audience member of QT.

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    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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