“Where have all the green shoots gone?” asked the Financial Times in an editorial in its weekend edition after the UK economy seemingly worsened in an early reading of third quarter economic growth.
“Economists remain capable of shock at seeing their forecasts contradicted,” the FT also remarked.
Good point — the use of the word “shock” was very appropriate as it described the reaction to Friday’s news that growth fell 0.40% in the September quarter, according to official figures, rather than rising 0.20% as forecast by economists of every size and shape in the UK markets. More importantly, growth, as forecast in a Reuters’ poll before the figures were released, would have allowed the UK economy to escape the recession and claim to be growing again.
No such luck and economists have once again copped a pounding. Not one of the hundreds in the UK markets picked the 0.40% fall in the UK’s economic growth in the September quarter.
Economists after all in the Bank of England, the Banks, many universities, in the Government and among other regulators, had allowed or ‘helped’ the credit binge to happen, missed or didn’t see the crunch approaching, missed the impact of that on the economy and then the recession, and now, to cap off, have wrongly called the end to the slump. Oh dear. Through some more Keynes on economy to keep us warm this winter.
As inaccurate as this assessment is, it nevertheless contains some truth, especially about the forecast of third quarter growth, not continuing recession for the UK economy.
Unlike Churchill’s famous phrase about “their finest hour”, the forecasts for September quarter GDP growth in the UK was just plain wrong, but wrong from a bunch of people who are the public faces of these banks and other financial groups who have needed bailing out with cheap money from the central bank, matey deals from Government and now huge bonuses, while companies have gone broke, hundreds of thousands of people have lost their jobs, homes or both.
And if you think about the optimism economists had about the economy it wasn’t misplaced. Growth would have helped justify the killer profits many banks and financial groups are currently making from the easy money policies of central banks and allowed them to rationalise the huge bonuses on the way at many of these financial groups.
Positive growth would have enabled bankers to say “see, we have done our bit for the economy and growth”. Instead they are hearing “got it wrong again” and “paid too much for no return”. Perhaps those forecasts were made to look good by the queues at city bars and eateries, not the queues of unemployed and homeless people.
But the sheer shock and horror at realising the economy was still stuck in a recessionary run can’t be overstated. It goes beyond just a bit of easy economist bashing.
Of all the things that have happened in this crunch, from the run and collapse of Northern Rock, to the near implosion of the rest of the banks and the economy just over a year ago this month, Friday’s negative first reading of third quarter economic growth was devastating.
No more plucky Britain showing the way and defeating the crunch: Cool Britannia of Tony Blair is now recessed Britain of Gordie Browne who is now facing “A Winter of Discontent‘, which harks back to the bad days of Britain in the 1960’s and 1970’s when it was eventually bailed out by the IMF.
The figures were contrary to sentiment surveys of manufacturers, the service sector consumers, an up turn in house prices and purchases and a small rise in retailing activity. All these suggested that the level of demand and activity in the UK economy had picked up in the September quarter and were why there were so many confident forecasts of positive growth. But manufacturing trade and consumer spending all fell. only government spending role (unsurprisingly).
In the US, results from similar surveys and statistics are forecast to see the US economy emerge from recession when the first report on September quarter growth is released on Thursday. If that happens, it will further underline what is seen as the failure of the UK economists to ‘get it right’. Figures in the next few weeks are also expected to show Germany, Japan, France and Italy grew between July and September and each announcement will reinforce in Britain just how marooned the country remains.
If that happens, then the UK will be the last major economy still in recession, which now looks like being the longest and bitterest since the 1930’s. So gloomy were some commentaries that some analysts trotted out the ‘we’ll be rooned’ type of line, with some using the word ‘depression’ instead of ‘recession’.
But the commentaries became really ugly when later on Friday analysts at Citigroup calculated that Britain’s economy had been overtaken by Italy.
Citi claimed that the figures on Friday suggested Britain’s economy generated about £347.5 billion in cash terms compared to Italy’s estimated £350 billion, making Britain the world’s seventh largest economy. It brought forth an outcry of national angst, made especially bitter by the fact that the UK fell behind Italy in the 1990s.
But not one analyst or writer stopped to question the Citi figures on the simple basis that as their forecasts had missed the downturn in growth, how could anyone believe their claim of Italy producing more in the quarter than the UK (when the UK figures are based on just 40% of all available data)?
But no one stopped to question the reliability of Italy’s figures. It is after all a country committed to the concept of Bella Figura, (a beautiful figure or presentation to the world), especially with such a vainglorious leader as Prime Minister Berlusconi. The desire for self-abasement among UK columnists and commentators was too strong, off they hared on another example of national doom mongering.
Having had to endure the shock of an Italian manager leading England to the World Cup finals by getting them to play sold, controlled football, Britain is now being told that for a second time in two decades that Mr Berlusconi’s economy produces more value.
Part of the reason for the fall was the drop in the value of the pound against the euro, so it’s no wonder Italy (priced in the rising euro) produced more value than moribund Britain. After all, the falling value of the pound was why the UK slipped below France in the GDP rankings almost a year ago. But Italy, and Berlusconi. Basta!
However, the wider social and political impact of a simple set of figures (and failed forecasts) can’t be underestimated. Friday’s shock and reaction show to many people that banks and their economists have again proved themselves to be incompetent (and how can you pay bonuses for making dud forecasts and getting the economy so wrong?). It will affect the regulation of banks, especially with many now said to be about to resist pressure from the UK Government to detail their bonuses payments.
The damage to the remaining power and prestige of the Brown Labour Government from the economic figures also can’t be underestimated.
The Government’s re-election spin has been based on claiming the economy is back on track and growing. The Chancellor of The Exchequer, Alistair Darling was forced to change his timing for the return to growth for the economy from Friday from ‘by the end of the year’ to the ‘turn of the year’ implying now it will come in the March quarter, which will be very, very close to the election.
No doubt Mr Darling will be hoping that the Statistics Office got it wrong. It did indeed get an initial forecast wrong for the March quarter; it saw growth falling 1.9% and then had to revise it, downwards, to a fall of 2.5%. Mr Darling and the Government have forecast growth this year of minus 3.25% to minus 3.75% and positive growth of 1.25% for 2010. Both are now in considerable doubt, as is the future of his government.
Banks, bonuses, bank economists and the like are now fair game for anyone in the UK with a moan or seeking shift blame for the country’s predicament. There is now a nasty ‘have and have not’ divide appearing in Britain at a very inconvenient time. The nasty right wing (through the BNP) is on the rise. How soon before this becomes a question of civil unrest?