The British Office of National Statistics have published two new data releases in the last week which show that the British economy is plunging further into a deepening recession. On July 20, 2012, it published the Public Sector Finances, June 2012, which showed that the deficit is increasing. Then it published the – Gross Domestic Product, Preliminary Estimate, Q2 2012 – yesterday (July 25, 2012), which showed that the British economy had contracted n real terms by a staggering 0.7 per cent in the June quarter. The one hope on the near horizon for the British economy might be the Olympic Games, which are being use to gloss over the savage recession that the British government has deliberately created. However, a closer understanding of the way in which events such as the Olympic Games impact on the host economy suggests that the majority of benefits are already in the data and the dismal future facing Britain will not be attenuated by the running and jumping (and the rest of it).
The Public Finance data revealed no surprises.
The ONS say that:
Public sector net borrowing was … £0.5 billion higher net borrowing than in June 2011 … [the] … budget deficit was £13.0 billion in … [was] … £0.6 billion higher deficit than in June 2011 …
So despite attempting to cut net public spending the overall impact of that austerity push has been to expand it. A closer examination reveals that tax revenue is up in June although lower than earlier in the year.
The ONS says that a “large part of the rise in receipts between 2011/12 and 2010/11 was attributable to a rise in VAT receipts of £12.4 billion. This rise, in large part, reflects the change in the rate from 17.5 to 20 per cent”.
But spending grew faster and the ONS says that “The rise … is due to a rise in debt interest payments … a rise of net social benefits of … and a fall in other expenditure of £0.2 billion.”
In a slowing economy, governments find it hard to cut deficits because either tax revenue stalls in the face of the slowing economic activity and/or rising spending (either because welfare payments and/or debt servicing payments rise).
That data release shows that the British government is not yet achieving the reduction in net public spending that it desires and that failure is a good thing because it maintains a higher level of public spending support for the declining British economy.
But the release was a warm-up act for the National Accounts data release which was published yesterday by the ONS.
The headlines that greeted the latest National Accounts data were obvious – here is a sample:
3. And in the popularist press – http://blogs.telegraph.co.uk/news/jameskirkup/100172524/the-gdp-figures-are-a-brutal-size-12-boot-in-the-groin-for-george-osborne/.
4. And – the Chancellor cannot blame the weather.
The result is hard to massage in any consoling way or in any way that would convincingly absolve the national British government from being the primary culprits.
The following graph shows the real GDP index from the December quarter 2008 to the current quarter (June 2012). The current British government inherited an economy that was in the early phases of recovery after an extended period of recession. It was a fragile recovery as a result of the extensive private debt holdings constraining private spending and Britain’s trading performance being impaired by the death-wish policies employed in the Eurozone.
But it is clear that the recovery phase stumbled along for a while – under the support of the deficits that the previous government had allowed to occur. That recovery is now over and the economy is slipping badly.
There is no way to put a sugar coating on the data. All sectors (industries) contracted. The ONS said that:
1. Real GDP “decreased by 0.7 per cent in Q2 2012 compared with Q1 2012”.
2. “Output of the production industries decreased by 1.3 per cent in Q2 2012 compared with Q1 2012, following a decrease of 0.5 per cent between Q4 2011 and Q1 2012”.
3. “Construction sector output decreased by 5.2 per cent in Q2 2012 compared with Q1 2012, following a decrease of 4.9 per cent between Q4 2011 and Q1 2012”.
4. “Output of the service industries decreased by 0.1 per cent in Q2 2012 compared with Q1 2012, following an increase of 0.2 per cent between Q4 2011 and Q1 2012”.
So production and construction have now contracted for two consecutive quarters and are thus unambiguously in recession. And now the service sector, which had resisted the broadening gloom until now, is also in decline.
What an appalling indictment of government policy.
Real GDP is now below the level that the current government inherited in the second-quarter 2010. Real GDP has declined for the last three quarters.
You can see the way a recession spreads by noting that production output has been contracting for three quarters, construction for two quarters, and now the service sector. The gloom is spreading throughout the service sector.
Not surprisingly, given the public finance data, the government and other services sector continues to make a modest contribution to growth (0.1 per cent in the second-quarter).
The private sector is clearly not responding in the way the British government thought they would. In early 2010, the narrative was Ricardian – in that the Government and its supporters were telling us that private sector spending was subdued because they feared the future tax increases that would accompany the budget deficits.
Accordingly, so the story went, if the Government announced its intention to cut the deficit then the private sector would respond by boosting spending. What seems to be happening is exactly the opposite – which is predicted by Modern Monetary Theory (MMT) – the private sector is tightening its spending in fear of the contractionary consequences of the coming fiscal austerity.
The head of the OECD, who has a very high paying, secure, tax-free position, was wheeled out in the British media yesterday urging the British government to “persevere” and to “stay the course”.
The Independent quoted the OECD boss in this article (July 26, 2012) – George Osborne must stay the course, says OECD – as saying:
I would say to the Chancellor ‘Stay the course’, I would say to the Chancellor that the cost of wavering or looking like you are wavering or looking like you are weakening your resolve today because of what is happening in the markets – because of Spain and Italy and Greece and everything else – is very high indeed … This is very important, this is why the UK adjustment programme cleared the markets, this is why you have very low borrowing costs, this is why I think you should persevere.
You are now sowing the seeds of what will be the elements for recovery. You have to have credible public finances before you start moving on growth.
So the neo-liberal party line par excellence – the same line that created the crisis.
The OECD boss might be reminded that the UK government issues its own currency, can set bond yields at whatever rate it likes and is observing strong demand for its debt because it is seen by the bond markets as risk free.
He might also be reminded that Spain and Italy do not enjoy any of those things and the bond markets know that they are at risk of losing any funds they invest in purchasing the debt of those governments.
The continual conflation of monetary systems where the government is sovereign and those where they are not is a sign the commentator is clueless about the fine points of economics. In that sense, they are welcome to their opinion but should be disregarded by those who desire to understand what is actually going on.
The UK Guardian article (July 25, 2012) –
If the economy was a sick patient, George Osborne would be struck off – makes this point:
Britain’s economic performance has been similar to that of the eurozone crisis countries Spain and Portugal, even though the Bank of England has the luxury of being able to set bank rates and the pound has the freedom to fall.
The OECD has become part of the problem and should be disbanded. That could easily happen if the major contributing governments (for example, the US and Japan) simply withdrew their financial support.
I note that the IMF and the OECD never volunteer to reduce their budgets to help the government that fund them achieve the austerity that they recommend so vehemently. Then Mr Gurria might have to tough it out on the unemployment queues that his continual policy suggestions have created, sustained and now increasing.
Gurria also claims that there can be growth as long as the British government keeps “within the envelope” (which is his fancy term for cutting public spending).
The response of the British government has been to double the projected austerity period from five years to a decade. The currency-issuing British government appears intent on chasing Greece and Spain and the rest of them down the drain for the extended future.
I have been wondering for a while now whether the Olympic Games might give the British economy some relief from the downward spiral that its government is intent on pursuing. It is hard to make assessments on the net benefits that come from hosting the Olympic Games
While most studies of past games show that real GDP is boosted and there are employment gains, the relevant questions for the British economy at present are how much and over what period.
There was an interesting study by one John Irons in 2000 – The Economic Impact of the Olympics. That link is an archive of the original article and does not include the graphs that were in the original offering, which is now gone from the public arena.
But what his analysis showed, based on a comparison of real GDP growth performance for Olympic hosts from 1952 to 2000 to their long-run average growth rates, was that:
… prior to the olympics and during the olympic year GDP growth is higher than average – maxing out at nearly 1.5% above average
GDP in the 3rd year before the Olympics … However … [the data] … also suggests that growth rates are lower in the years after
the Olympics, than in the years prior.
Prior to the 2000 Sydney Olympic Games, the NSW Treasury commissioned a report to study the economic benefits of the Games for Sydney and Australia.
The Report – The Economic Impact of the Sydney Olympic Games – was released in November 1997.
The Report provided this summary Table of the benefits spread over three periods: The Pre-Games period from 1994/95 to 1999/2000; the actual Games year 2000/01; and the 4 years following the Games – 2001/02 to 2005/06.
In relation to the summary table the Report concluded that:
… the effects of the Games are spread unevenly over the three phases with the bulk of the gains accruing in the first seven years of the twelve-year Olympic period. For instance, 61 per cent (or almost $3.8 billion) of the NSW increase in GSP, in net-present value terms, results from the pre-Games phase, while the Games year, which results in the largest single-year impact, contributes a further $1.2 billion (present value to 1995/96).
The last phase, despite significant Olympics-induced tourism and manufactured goods exports and an assumed slight Olympics-induced boost in labour productivity, contributes less than $1.3 billion to the total impact on the net present value of NSW GSP.
Those estimates are certainly consistent with many studies of previous Games.
The NSW Treasury study also summarised the results of many similar studies for previous Olympic Games (see Appendix A.4.2) and said:
1. Early estimates of international visitors are typically overestimated – that is, less turn up than is expected and factored into the forecasting models which estimate the likely net benefits of the event. Remember all the empty seats in Athens and the “rent-a-crowds” (aka PLA) in Beijing.
2. Further, the patterns of spending by Olympic visitors is significantly different to that associated with tourism in general. The lesson in that Olympic visitors tend to stay clear of the usual tourist haunts and this reduces the revenue that the Government gets from various taxes (alcohol, gambling etc).
3. Local residents also change their own spending patterns during the Olympic Games to avoid price gouging and congestion that accompanies such events. They go to restaurants else and frequent other public spaces where they might have spent.
The upshot is that the gains accruing to Britain as a result of hosting the Olympic Games this year are almost certainly mostly exhausted. There will be some positive contribution in the coming year but the major gains are already in the data.
If that is true, then it makes the performance of the British economy even more dire.
There is no sugar coating in the data.
Britain is now in a deepening recession and its government is to blame. Pity there is not an election imminent and pity the Opposition is so weak and misguided.
Pity also that the Liberal Democrats abandoned their values and become tied up in this sorry tale of power.
Alternative perspective on the Olympic Games
Since the 2000 Olympic Games I have been publishing (for fun) my Alternative Medal Tally.
There are many ways to express the Medal Tally and you can become as complicated as you wish, subject to the rather severe data limitations. While the exercise is fun I do consider the extra information provides a more meaningful perspective than the official rankings, which merely add up medals and give no particular significance to the size of the economy, the population size and the different types of medals.
I will repeat the exercise this year and you will be able to follow my weighted indexes at this page – Alternative Olympic Games Medal Tally.
That is enough for today!
(c) Copyright 2012 Bill Mitchell. All Rights Reserved.