No real surpises accompany the latest UK GDP figures. The UK economy is in bad shape, shrinking by 0.2% in the last quarter of 2011, but with the government intent on its austerity path and the UK’s biggest trading partner, the Euro Zone, seemingly determined to prolong its debt crisis, what more could we hope for?
One of the most worrying aspects of the data is that real GDP has still not recovered to the 2007 high, see Figure 1. Instead of showing signs of climbing towards and beyond the previous peak, the economy has turned lower again.
Figure 1: UK real GDP and GDP growth since 1998. Source: ONS.
The Bank of England has done what it can to provide stimulus through monetary measures, with ultra low short-term interest rates and large swathes of government bond purchases pushing long-term rates lower too but the transmission to the wider economy beyond the banking system is still not evident.
However, one advantage of this is that new issuance has been at historically low coupons ensuring that ongoing government financing costs will be relatively low so when the UK economy does strengthen, a lower proportion of income will be spent on financing the debt and more can be spent on paying off the debt as well as investing in the economy.
Loose monetary policy has also weakened sterling but this has failed to boost manufacturing, leading instead to a fall of 0.9% in Q4 despite reports of some exporters enjoying greater sales to Asia.
Figure 2: UK manufacturing has struggled to grow for years. Source: ONS, BOE.
Although UK manufacturing was boosted initially after the financial crisis, the weaker pound has failed to boost the sector by as much as hoped. Even in the pre-crisis years, manufacturing growth oscillated above and below zero while the latest figures show manufacturing growth for the whole of 2011 to be back at zero again.
Figure 3: The changing contributions of manufacturing and services to GDP (% of GDP) since 1997 in the UK. Source: Eurostat.
Figure 3 clearly shows how the UK economy has changed since 1997. In Germany by comparison, the manufacturing industry has remained roughly the same size relative to GDP.
The government talks of rebalancing the economy but given the decline over the years, a reversal of this trend will be much more of a long-term initiative than anything that can be achieved in the next year or so.
Figure 4 breaks the service sector into three segments and shows the growth of these segments since 1997.
Figure 5 (a)
Figure 5 (b)
Figures 5 (a) and (b): The change in UK GDP contributions since 1997. Source: Eurostat.
The short term depends on household budgets. Higher inflation, unemployment and stalling wage growth have squeezed household budgets leaving less disposable income and this is hitting GDP growth.
The UK has had an external trade deficit for many years and it is now much harder for exports to take up the slack of weak domestic demand especially when the UK’s major trading partner is also tightening purse strings.
Figure 6: Expenditure side UK GDP contributions. Source: Eurostat
Figure 6 shows the contributions of the expenditure side GDP components as a percentage of total GDP. The purple sector is above 100% for most of the period back to 1997 indicating the negative external trade balance of the UK i.e. exports of goods and service is less than imports.
During the recession in the early 1990s, the weakness of sterling in the aftermath of the ERM exit helped to boost the UK economy but with the slump in global demand, currency weakness is not providing the catalyst this time around.
With inflation expected to fall this year, consumer woes should marginally ease but for a more serious attempt to boost growth the Chancellor must “bend” his austerity pledge and fiscally stimulate the economy.