eInsight, Economics Update Bulletin, March 2010_________________________
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Welcome__________...to the eInsight Economics Update for March 2010. Here, our experts summarise the key developments this month, particularly discussing the long-term consequences of the recession as the UK looks to recovery.For even more insight and debate, take a look at our blog, The Volterra Approach, featuring regular intelligent comment on the issues of the moment. |
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Europe lags behind in recession recovery
The speed of recovery from the recession has been quite different in the major developed economies. In general the story is that the US and Japan are steaming ahead, China and India barely paused for breath and are now back on track and posting huge growth figures, and Europe is languishing behind somewhat.
In the US and Japan stimulus packages introduced by government are gradually giving way to growth driven by the private sector.
In Europe, strong growth from France has been unable to offset the relatively flat economies of the UK and Germany, and the contraction seen in Italy and Spain, to say nothing of the situation in Greece. In Europe the evidence so far is that the private sector’s confidence has not rebounded as fast as in the US.
Fiscal concerns in Greece, as well as Spain, Portugal and Italy, have added further uncertainty to the outlook. Concerns over government debt and plans to reduce the level of government borrowing to more sustainable levels are likely to be a central theme of the economic situation in 2010.
The recession in major OECD countries
House prices fall in latest data »
House price data for February from Nationwide Building Society indicates that prices have fallen back by 1 per cent. The result comes at the same time as mortgage lending figures for the latest month have fallen 17 per cent.
This fall in house prices has been caused by a combination of the ending of the stamp duty holiday and bad weather. The stamp duty threshold, which was temporarily pushed up to £175,000 in order to tackle falls in the housing market, has now dropped back to £125,000.
So is this fall a statistical blip or the start of a fresh round of falls in the housing market?
Given that the recovery in prices through the second half of 2009 has not been based on economic fundamentals, but rather on a shortage of stock and the entry of cash- and equity-rich buyers into the market, it is not surprising to see some falls. Until we have sustained increases in household income and falls in unemployment, further falls are likely. This is not to say that a second sustained downturn will materialise, but rather that a weak housing market is to be expected until the underlying economic drivers recover.
Nationwide Average House Price
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Worries over the level of UK government debt have pushed long term gilt yields to around 4.4 per cent and medium length gilts to 4 per cent. There is a strong possibility of further increases.
Yields are moving out due to concerns over the long term future of the UK economy. The perception of increased risks in the UK means that investors require a higher yield to compensate for this risk. At the same time the Bank of England has ended its quantitative easing programme, which whilst operational supported gilt prices and kept yields low.
An increase in long dated gilt yields will have important implications for riskier assets, such as commercial property, which require a risk premium above the yield available on gilts. Taking the example of property, if the premium over risk-free gilts is to be maintained whilst gilt yields are moving upwards, then we may see falls in commercial property prices.
Medium length gilt yield
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Recession deeper, recovery stronger»
In the last month a number of revisions have been made to the UK’s GDP data. Revisions to the quarterly data are common, and reflect the increased availability of real (rather than modelled) data over time. The latest set of revisions is particularly interesting: Q4 2009 saw a slightly stronger emergence from recession than previously thought, but the actual depth and severity of the recession was worse than thought.
The estimate of growth in Q4 2009 is now 0.3 per cent, a slightly stronger emergence from recession than the original 0.1 per cent estimate. However, due to revisions to GDP estimates further back, the overall depth of the recession has been made more severe. The total fall in GDP from the pre-recession peak has been 6.2 per cent. As such these revisions suggest that the recession was slightly deeper than first thought but that the emergence has been slightly stronger.
In an historical context, at 6.2 per cent of output lost, this recession is in the top 10 per cent of all non-war recessions in the UK since 1871. As such the depth of the recession has been particularly severe.
It is noticeable that the employment data tell a different story from the output data and show unprecedented falls in productivity. Either that or the depth of the recession is overstated and upward revisions will appear in due course.
At 6 quarters long, this recession has not been long in an historic context. Looking at the annual data, this recession has effectively been 1 year long (2008 posted modest growth overall, 2009 posted a loss). 70 per cent of all non-war recessions in the UK since 1871 have been just 1 year long.
In an historical context, then, this recession has been deep but fast.
It is interesting to note that taking 17 developed economies since 1871, the occurrence of ‘double-dips’ is very rare. Once recoveries begin they are sustained.
It is noticeable that the unemployment increase has been much less severe than the output data would suggest, indicating unprecedented falls in productivity. This could be due to the fact that employees have cut hours rather than lose their jobs. Either that or the depth of the recession is overstated and upward revisions will appear in due course.
UK GDP
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