Recovery Still On Track

Yesterday’s preliminary reading for UK, Q2, GDP, shows that the recovery remains on track. It showed GDP fell by just 0.8% compared to the fall of 2.4% for Q1. In fact, the figures are almost certainly better than that. This was just the preliminary reading. Besides the fact that there is a 0.3% margin of error n the data, the preliminary figures are always incomplete, and are subject to two revisions as fuller information comes in. For this data only information for April is included for a large part of the economy, with information only for April and May making up much of the rest. Given that Q1 data showed that the rate of decline was increasing into February and March, and given that the 0.8% figure shows a marked reduction in that rate of decline (what economists call the second derivative), then its almost certain that data which is skewed to the beginning of the quarter, when the recession was probably at its low point, will considerably understate the extent of the recovery.

Most of the news media, back in Britain, as far as I can see from here, appear to have been concentrating though, on the fact that the 0.8% drop is more than the 0.3% fall some economists had been recently forecasting. This is typical of the media reporting over the last year or so. In fact, as I said here , although the reports from the NIESR of growth in some sectors in April and May were encouraging, it was still likely that Q2 would still show a decline, and that growth would not actually show through until Q3. That would make the recession typical in duration for similar previous downturns during other Long Wave booms.

Other data out last week for the Eurozone continued to show that both actual economic activity as reflected in the Purchasing managers Index, and consumer sentiment continues to rise. In fact, a number of these indices are at their highest levels for almost a year. China has resumed growth of around 8%, and although some commentators have tried to pass this off as being mainly fuelled by the Government stimulus other more detailed analysis shows that most of this growth represents endogenous economic activity in the form of consumer spending, and business investment. In Singapore, recent data shows a remarkable turnround, with growth standing at an incredible 23%!! This is important given Singapore’s role as a regional trading hub for Asia. Other signs of increasing global economic activity comes in the form of the steady rise in oil prices back up to $70 a barrel, and a resumption in the rise in commodity prices.

The weak point seems to be the US. Yet, even in the US there are positive signs. Although, unemployment continues to climb, the moving average of jobless claims is declining, house prices have begun to stabilise etc. Moreover, only a fraction of the Government stimulus package has found its way into the economy. That part of the stimulus that was put out most quickly in the form of tax cuts, appears largely to have gone to help families rebuild their Balance Sheets by paying down some of their debt, rather than to have provided any immediate economic stimulus in the form of increased consumer spending. We are likely to see the impact of the stimulus take effect more in the second half of the year, and with US banks having also rebuilt their Balance Sheets, and now as I predicted some months ago, beginning to make big profits from almost free money, the current situation, described by Keynes as “pushing on a string”, whereby increased Money Supply fails to act as stimulus through lack of demand for Money causing a fall in the velocity of circulation, is likely to be overcome.

In fact, as I will show in my next article on “Reclaiming Economics”, according to Keynes, even the increase in savings being seen in the US now, as US citizens use the tax cuts to rebuild Balance Sheets, can act to raise economic activity, provided that saving goes to finance increased productive investment. The problem at the moment is that without rising consumption, or some other incentive, US business are not likely to increase productive investment, so the saving goes to finance unproductive investment in the form of a build up of inventories. Yet, the data from the last few months shows not a build up of inventories, but a considerable de-stocking. The reason for that is clear. Businesses, at the end of last year, thinking the world was coming to an end, almost stopped everything. They cancelled orders, and avoided placing new ones. That caused a huge dislocation reflected in the big falls in GDP in the last quarter of last year and first quarter of 2009. They then used there inventories to meet current orders. Part of the reason for the rapid turnround has been the fact that having seen that the world did not end, businesses had to begin restocking once these inventories were used up.

In the last few weeks further data has been coming out, which further supports the argument I put forward in my post Why The recession Is Over . I haven’t had time to put together the detailed data, but its becoming clear that the kind of restructuring of Capital I spoke of is continuing apace in the US with now a significant number of workers being employed in production of alternative energy, and other such high-value added production. Its also becoming clear that this strategy is going to be one adopted by Capital in most of the developed economies – despite the current strike at Vestas against closure. Both Mercedes and BMW have announced that they will be bringing out electric cars next year. The decision to set up the Lithium battery plant in the North-East by Nissan is another indication of the extent, to which Capital is doing what it has always done in similar periods in the past, and is moving to new areas of production, which offer the potential for much higher rates of profits, whilst more mature production is increasingly being concentrated in low wage economies. The decision in the UK and the US to invest large sums of money in rail electrification is another sign of that, and in both countries there is increasing attention to the need for massive investment in the electricity grids themselves, utilising modern technology, and the potential for decentralised production and distribution.

Despite the hopes of some on the extreme right, and some on the Left this is not as I said last year a repeat of the Great Depression. The most powerful Long Wave Boom we have yet seen remains in place. Britain, and the US will suffer relative decline as over the next 10-20 years China and India become the world’s leading economic and military powers – and the same process I described 25 years ago that saw the Asian Tigers develop is now also beginning to arise in a number of African “Lion” economies – but relative decline is not absolute decline. The challenge for the Left is how it understands and relates to that process, but I’ll leave that discussion for a future post.