Economic decline unrevised
The latest British economy healthcheck has revealed that the 1.5% decline in economic output in the final three months of 2008 does not have to be revised downwards.
The Office for National Statistics (ONS) confirmed back in January that the UK was officially in recession, with the Gross Domestic Product (GDP) – the measure of economic growth – shrinking by 1.5% in the last three months of 2008. This followed a 0.6% contraction in the previous quarter, with a recession defined as two consecutive quarters (or six months) of negative growth.
The ONS has now reviewed its figures for quarter four and, despite expectations that the decline in economic growth was worse than thought, has revealed it is not revising its 1.5% figure.
In December, the ONS was forced to revise the GDP figure for quarter three, from 0.5% to 0.6%. It blamed falling manufacturing output for the change.
The news that GDP will not be revised down for quarter four should come as a “relief”, according to Vicky Redwood, UK economist at Capital Economics.
The ONS’ figures show that the British economy grew by 0.7% throughout the whole of 2008, compared to growth of 3% the previous year. GDP in the final quarter was 1.9% lower than the same period in 2007.
Over the three months, the output from construction, manufacturing and service industries all fell while consumer spending was down 0.7%.
Redwood adds that there is still plenty to be gloomy about.
She points out that both consumer spending and investment were down in the fourth quarter, while exports also fell sharply.
“Overall, the economy still looks set to contract by around 3% this year – and we think a further fall in 2010 is likely too,” warns Redwood.
In contrast, the Bank of England has repeatedly expressed hope that economic recovery will be seen in the second half of this year.
Howard Archer, economist at Global Insight, warns the fact that quarter four wasn’t any worse than expected “does not change anything”.
“We still thing the economy will shrink by 3% in 2009,” he adds. “The first half of the year will see a sharp contraction in growth, and although this will ease in the second half, a return to growth will not happen until 2010.”
The GDP update comes a day after Andrew Sentance, a member of the Bank of England’s Monetary Policy Committee, claimed the 18-year gap between the current recession and the last has led to “apocalyptic and hyperbolic” comparisons.
Speaking at a conference held by the Institute of Economic Affairs, Sentance told delegates: “In terms of recent experience of recession, we are in a very different position from the situation in late 1990, when the economy last turned down as sharply.”
While he admitted that it is too early to predict how long and how deep the current recession will be, Sentance added: “the GDP profile is not obviously tracking lower than previous recessions yet”.
The MPC member did, however, hint that the central bank was looking at printing money – known as "quantitative easing" - to help boost the economy.
Lower interest rates encourage people to spend, not save. But when interest rates can go no lower and there is a sharp drop in consumer and business spending, a central bank’s only option to stimulate demand is to pump money into the economy directly. This is quantitative easing. The Bank of England purchases assets (usually government bonds, or gilts) from private sector businesses such as insurance companies, banks and pension funds financed by new money the Bank creates electronically (it doesn’t physically print the banknotes). The sellers use the money to switch into other assets, such as shares or corporate bonds or else use it to lend to consumers and businesses, which pushes up demand and stimulates the economy.
Monetary Policy Committee
A committee designated by the Bank of England to regulate interest rates for the UK. The MPC attempts to keep the economy stable, and maintain the inflation target set by the government and aims to set rates with a view to keeping inflation at a certain level, and avoiding deflation. The MPC meets on the first Thursday of each month and discusses a variety of economics issues and constitutes nine members: the governor, the two deputy governors, the Bank’s chief economist, the executive director for markets and four external members appointed directly by the Chancellor.
The total money value of all the finished goods and services produced in an economy in one year. It includes all consumer and government consumption, government spending and borrowing, investments and exports (minus imports) and is taken as a guide to a nation’s economic health and financial well being. However, some economists feel GDP is inaccurate because it fails to measure the changes in a nation's standard of living, unpaid labour, savings and inflationary price changes (such as housing booms and stockmarket increases).