“The recovery is based on shaky foundations,” said Capital Economics in its analysis of the latest data on UK GDP. The good news, according to our beloved complier of statistics otherwise known as the ONS, is that the UK never did have a double dip recession after all. The bad news? Well, there’s lots of that.
Do you remember Norman Lamont? Poor old Norm! He said he could see signs of green shoots. The media, with stats to back them up, had a jolly good laugh at the then chancellor’s expense. Subsequent data showed that Mr Lamont was right, but by then no one cared.
When data out last year revealed that the UK was back in recession, people cared a great deal. At one point, the ONS had the UK contracting by 0.4 per cent in Q4 2011 and by 0.3 per cent in Q1 2012. So that was two quarters of contraction; woe was up, the UK was in recession. The ONS had the UK contracting in Q2 2012 too, but that is a different story.
Since then the ONS has revised its data, and then revised it some more, and in its latest revision of revision of revision it is now saying that the UK was in fact flat – that is to say growth was zero per cent between Q4 2011 and Q1 2012. So there was no double dip. It also decided that the recession of 2008/09 was worse than it previously estimated, with the UK contracting by 7.2 per cent instead of by 6.3 per cent as it previously estimated.
The news on the latest quarter was okay, but not so good when you drill down. It also has current GDP 3.9 per cent below the pre finance crisis peak, whereas it previously had GDP 2.6 per cent less than peak.
The ONS still reckons the UK expanded by 0.3 per cent in Q1 this year, however. But it recorded a 1.9 per cent drop in business investment, despite a 4.9 per cent rise in company profits. In other words, companies are not investing their profits. Household incomes were 1.7 per cent less in Q1 than in Q4 2012, which does rather beg the question: if incomes were less and investment down, how did growth occur? The answer lies in savings – or rather lack of them. The ONS reckons households' saving ratio has fallen from 5.9 per cent in Q4 2012, to 4.2 per cent in Q1 2013. So can that last, and indeed do we want it to?
The UK economy needs its households to spend more and save less. But common sense dictates that households need to save more. The answer lies in households saving more, and the money saved being used to fund investment. But as the fall in business investment shows, this has not happened.
Here is an idea: why doesn’t the government borrow from these savings, and invest the money? Well, if it did it would become a Keynesian government, and we wouldn’t want that, would we?
© Investment & Business News 2013