Tuesday, 1 November 2011

UK Q3 GDP Really Zero

According to the ONS, today, the UK economy grew by 0.5%, in the third quarter of 2011, ahead of expectations of 0.3%. However, if we take the ONS at its word, then, in real terms, it did not grow at all!!! In its comments, in relation to the release of the second quarter GDP figures, from April to June, it explained the dismal 0.2% figure by saying that it had been distorted downwards by “Special Factors”. These special factors were things such as the Royal Wedding, the Japanese tsunami etc. It said that these had reduced growth by 0.5%, and that this would be recovered. But, in that case, if growth was only 0.5% this quarter, it has only managed to grow by the amount deferred from the last quarter, meaning no new growth at all! In fact, it could be argued that it is worse than that. The ONS subsequently revised the Q2 figure to only a 0.1% rise. If that means that the distortion was 0.6%, then this quarter's figure has not even managed to recoup that distortion, meaning the economy is already really shrinking. The NIESR have already said they believe that to be the case, and survey data back up that conclusion.

The UK Manufacturing Purchasing Managers Index, released earlier, fell to just 47.4, the lowest figure since March 2009. Any number below 50 represents contraction. On top of that, other economic data show the economy heading rapidly back into recession due to the austerity measures being imposed by the Government. Unemployment is already at a 17 year high, and, with a 10% fall in University applications, that will mean an additional number of young people remaining on the dole queue, adding to the record high number of youth unemployed, which has already gone over a million. The ONS figures themselves, showed that on an annualised basis, even this distorted figure for Q3, represents a fall to 0.5% from 0.6% last quarter. The Government are frantically trying to talk up the economy, as they recognise that they are in deep trouble, and are coming under pressure to change course. With the decision of Greece to call a referendum on the Bail-out deal, and with Portugal now responding, as they were bound to, by calling for concessions on their own bail-out, the hope the Liberal-Tories had that Europe would come to their rescue is fast disappearing.

Meanwhile, The Independent have reported that Credit Card debt in the UK is soaring, as families seek to cover the monthly deficit between the falling wages, and soaring inflation. They quote a report by Shelter and Co-op Insurance, which says,

nearly a third of struggling families are being forced to spend more money each month than they have coming in, with the average adult facing a monthly shortfall of £165.”

Its no wonder we are seeing a new rash of TV adverts by Usurers charging over 1,000% interest on pay day loans, and that we are seeing the return of the “We Buy Any House, Car etc” merchants who will give you, at best, 60-70% of the current value of those items you need to sell to raise money. In fact, although the Government has gone overboard for the last 18 months with its scare stories about how Britain was in danger of becoming Greece due to the Public Debt, it is Private Debt in Britain, which is the much larger problem, and set to become even more of a problem. Public Debt stands at around £700 billion, but Private debt stands at more than £2 Trillion. The Government can always print more money to cover its debt, but individuals have to either pay up or become bankrupt. The latest figures show an increasing number will be forced to do the latter. Given that a large amount of this private debt is tied up in property, it will inevitably mean a crash in house prices, and big problems for the Banks and Building Societies who have irresponsibly lent huge amounts of money, at reckless multiples against income, to people who will not be able to pay it back. As has happened elsewhere, when the mortgages go bad, and the house prices collapse, the Banks will find themselves holding worthless assets.

There is another factor playing into that scenario. Over the last few weeks a new Credit Crunch has been developing. As a result, UK Banks are finding it more difficult to borrow, and are paying much higher rates on the money they can get their hands on. Nowadays, especially with such negligible rates for savers, the Banks and Building Societies are reliant upon this borrowing in the Capital Markets, to fund the mortgages and other loans they make. That was the problem that afflicted Northern Rock back in 2007, and then affected other Banks in 2008.

Even without an increase in the Bank of England’s Bank Rate, the Banks and Building Societies are having to pass on these higher interest rates in higher mortgage rates. Moneyweek reports,

Lloyds, the largest mortgage lender in the UK, has just raised its standard variable rates (SVR) – the rate to which borrowers coming to the end of a deal move on to – from 4.84% to 4.95% for borrowers with The Mortgage Business and the Bank of Scotland (both part of the group). At the same time, some banks have begun to raise SVRs and tracker rates for new customers; something that appears to have taken many by surprise.

One couple quoted in the Telegraph declared themselves “dumbfounded” by the rise. They are in the process of selling their house. I wonder if the higher payments will make them feel like cutting the price to get it away a little faster? Given that transaction volumes are under half their peak levels and that the average house is now selling for around 10% under the asking price, it might not be a bad idea.”

All of the factors required to ensure growth in the economy are heading in the opposite direction, and the austerity measures being undertaken are the basic cause of that. The problem is that even changing course is not likely to have the necessary effect, because as I have said previously, it requires more input to reverse the downward momentum than is required to maintain forward momentum. Only a large scale programme of restructuring and stimulation across Europe is likely to be able to do that. At the moment a financial collapse, causing something approaching a Depression seems more likely.

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