Monday, August 25, 2008

For some, the recession is already here

Last week, the ONS reported that UK growth had ground to a halt. However, the second quarter zero growth rate hid deeper, more disturbing trends. For example, agriculture, construction and manfacturing sectors actually shrank. In the case of the latter two, the declines were huge. So the recession is definitely here for those firms that build and make things.

Ironically, finance and business services continued to grow. While the growth rate has slipped, the sector is still well north of a recession. It also suggests that the credit crunch has not been quite as traumatic as some would suggest.


  1. Very interesting graph! Inflation is also posing a problem for the UK. Core inflation (ex food and energy) is 2.91%, it's highest rate since at least 1997, and headline inflation is at 4.41%, it's highest rate since 1992; both are seriously wobbling the Bank of England.

    With the inflation mandate, the BoE doesn't have much room for easing, and the lack of expansionary policy is certainly restricting your economy in the short run. What do you think that the BoE will do through 2008? Ease?

    I have a tendency to think that they will stick to the inflation guns and not ease unless inflation actually starts to abate. The wage pressures are just too strong.

  2. Rebecca

    I am the only one on this fair isle that thinks the BoE should raise rates. Inflation will shortly hit five percent. Assuming that next period's expected inflation rate is close to the actual rate, then we have something like a zero real interest rate. That is bound to lead to inflation, distorted price signals and plenty of other nasty things.

    The first thing the BoE should do is establish a firm positive interest rate and go from there. Once inflation is decisively coming down, then they should ease.

    BTW, I did an earlier post on the UK fiscal stance. I reckon that the treasury has eased FP by about 0.7 percent in the second quarter. It is a totally irresponsible thing to do, especially as inflation is picking up. So policy is expansionary but hitting a very tight supply side. The result is, of course, more inflation.

    As for core inflation, I refuse to acknowledge the concept. It is totally misleading, especially since the non-core items are systematically diverging from the core items. It lulls central banks into thinking that there is less inflation out there.


  3. I find the agriculture figure rather odd. As someone in that field (so to speak) I would have said said there was no reason for farming to be suffering a drop in output. Prices for produce are higher now, even allowing for the recent falls, than just over a year ago. Sentiment in the agricultural sector is good, with many using the profits from the high prices to invest in new machinery/buildings. I can only assume that this is a statistical anomaly based on the rapid rise and now fall of commodity prices.

  4. Sobers,

    It could be something seasonal

  5. Hi Alice,

    I don't understand why you (and others) refuse to acknowledge core inflation - especially from a central banker's point of view.

    As an example:
    U.K. - headline: 4.4% (y/y) and rising sharply since Sept. '07; Core: 2.91% (y/y) and rising sharply since Mar. '08.

    Canada - headline: 3.4% and rising sharply since Mar. '08; Core: 1.5% and remains unchanged for the 4th consecutive month.

    Both economies experience stronger wage inflation than in the US, but Canada is clearly in the better boat. With core prices remaining stable, there is clearly more room for expansionary monetary policy on the part of the Bank of Canada - especially since energy prices are set to abate.

    What do you mean by "especially since the non-core items are systematically diverging from the core items?"

    Thanks and I really like your blog!