There is a chart regarding the UK economy which has become so ubiquitous it is known in our office simply as “the Niesr chart”, because it is often republished by the National Institute of Economic and Social Research. It is supposed to be a clear and concise account of Britain’s recent economic woes, putting the recession into accurate context of past recessions. It shows the current recession as the longest and nearly the deepest since the start of the 1930s. People don’t generally know that in the UK the 1920s recession was much worse, but I’ll leave that for now.
Here is the latest version of “the Niesr chart”, published today. Take a good look at it before I tell you why I have begun to become irritated by it.
It is arresting because it does most things right. It is simple to understand. It is clearly drawn and obviously in context. The problem is that that the Niesr chart might be showing us irrelevant nonsense. It is also not a sufficient description of the UK’s recession.
In recent weeks, the Bank of England’s problem has been inflation. It is too high at 3.7 per cent in December and going higher. Now the Bank has something apparently worse on its hands: stagflation. The Office for National Statistics has just shocked everyone by saying the UK economy contracted by 0.5 per cent in the final quarter of 2010. Expectations had been for a 0.5 per cent increase.
Nothing could cheer the Monetary Policy Committee more. Now it can bat away suggestions it should be raising interest rates with the comment that this would be nuts as the economy is again contracting. High inflation is nothing to worry about if the economy is still in intensive care.
Buoyant US economic data has revived a debate over the shape of the US recovery.
In congressional testimony this week, Ben Bernanke made clear he thought the risks of a “double-dip” recession, while “not negligible”, had fallen in recent months.
So Germany – alone among the seven richest nations - may see a “double-dip” contraction? That at least is what the Organisation for Economic Cooperation and Development has suggested in its latest forecasts.
Really? The OECD’s forecast of a first quarter contraction seemed odd, especially as it coincided with more good news on German industrial orders. Dispelling fears of a fall, German orders held steady in February, after a whopping 5.1 per cent rise in January, the Berlin economics ministry reported. Business confidence indicators and purchasing managers’ indices have also been strong recently.
It may be semantic and definitional. It may be highly significant.
Revisions to estimates of Swedish growth in Q3 and Q4 last year show that the country’s economy contracted in both quarters. Both of the revisions are less than a percentage point, and could be within a margin of error. But that would still confirm the fragility of any putative recovery.
Calling a turning point is tricky, and offers ample room to make oneself look silly.
But I reckon a good indicator is surprise. If pundits expect the continuation of a trend, and are surprised, that suggests either a temporary blip or a reversal. And if there are many such related surprises, evidence strengthens for the reversal.
Well, there is a lot of surprise in this office at the moment. Every day there seems to be a new (negative) data release for the UK or US – and every day I see colleagues raising eyebrows at the size of that surprise. An eyebrow raise, in Britain, is a powerful indicator.
So I’m keeping a list, below, of the latest data releases.
Britain’s recession ended towards the end of last year. So said the National Institute of Economic and Social Research, a few minutes ago. In fact, the respected think-tank believes the trough of output was rather earlier in August and the economy has grown 1.6 per cent between August and December, not bad.
NIESR’s estimates are based on the industrial production numbers and, with the notable exception of the third quarter, are usually very accurate in front-running the official preliminary estimate of GDP. They suggest the official figures will show 0.3 per cent growth in the final quarter.
So if Britain has been out of recession for nearly half a year, what does this imply for monetary and fiscal policy?
The Fed paid a record $46.1bn to the US Treasury in 2009, the central bank reported today, after riskier holdings boosted its income 40 per cent to $52.1bn over 2008.
“The significant increase in holdings was primarily due to increased securities holdings as a reseult of the Federal Reserve’s response to the severe economic downturn,” the Fed said in a statement.
The many City economists who have been accused of having egg on their faces because they thought the initial UK third quarter growth figures looked funny, no longer look silly. The Office For National Statistics has just revised up its estimate of construction output in the third quarter from an estimate of -1.1 per cent to +2.1 per cent.
Alone, this will almost eliminate the recorded contraction in the third quarter (reducing the quarterly decline to 0.1 per cent), makes the Bank’s growth forecasts appear less outlandishly rosy, brings Britain’s official figures closer into line other indicators of the period and the European norm, and brings the eventual exit from 0.5 per cent interest rates and £200bn of quantitative easing a small step closer.
For officials and the minority of economists who insisted the initial figures were accurate and the City was whinging because it had got things wrong, this is a tad embarrassing. This is how the ONS put it this morning.
Competitive devaluations threaten trade wars, says Michael Pettis, citing the Vietnamese devaluation. The theory is that countries unable to devalue will be forced to raise tariffs. This comes as North Korea strikes two zeros off its currency, the won. But the picture is more complex than that. Chris Giles agrees that competitive devaluations could lead to currency trade wars, but argues the devaluation of the dong – still under pressure – is not the trigger. Neither is the won.
Creditors of Dubai World, including hedge funds and banks, have formed a group. It seems that investors in $3.5bn of Nakheel’s bonds will form 25 per cent of the issue, meaning they can block bond restructuring plans.