Economics news – Don't worry about the double dip ...
Good news - no need to worry about a triple dip, the double dip has been eliminated from history according to the latest release of the National Accounts data from the ONS this week. The hint of a double dip has been smoothed away.
The good news continued as the increase in activity was up held at 0.3% growth into the first quarter of 2013. The economy is "healing"!
Slightly concerning, the recession in 2008/9 was now worse than we had believed. The economy fell by 5.5% in 2009 compared to the 4% last feared. Despite the rally into the year, the economy remains some 4% below peak in the first quarter of 2008.
Worse still the comparison of year on year growth is much lower than first thought. In the first quarter of the year growth was up by just 0.3%. We have to be less bullish about the year as a whole as a result but 1% growth still remains a possibility.
Relying on data from the ONS is like planning a mountain trek with a dodgy GPS device. Every so often you tap the tracker and find out you are not exactly where you were led to believe, having arrived by a different route from that last chosen.
Who would have thought for example, between 2000 and 2008, the economy grew by almost 3% a year. Had only we known, we had it so good, the Governor could have taken away the punchbowl much earlier. In the USA, the feral hogs could have been put out to grass and the heavy drinkers could have been weaned from Wild Turkey to cold turkey much earlier in the process.
For lovers of nominal GDP targeting the revisions should be a clear warning. Nominal GDP grew by an average 5.5% over the period 2000 - 2008. The problem for policy makers, the GPS device was on the blink, with only a sporadic reading available.
For lovers of forward guidance, the reaction of bond markets to Bernanke’s comments on QE and tapering, should also be a warning. The statement led to a 100 basis point jump in Treasury yields. The market “over reaction” led to criticism of by the Dallas Fed chief, “Traders are behaving like feral hogs”.
“Investors shouldn't overreact to the central bank's plan to reduce the pace of asset purchases”, the Dallas Fed chief Richard Fisher said in an interview with the Financial Times this week. Investors behaved like "feral hogs" after the comments by Bernanke.
"What we're talking about here is dialling back," said Fisher, president of the Federal Reserve Bank of Dallas. “I don’t want to go from Wild Turkey to Cold Turkey”.
For the more technically inclined. Wild Turkey Bourbon is super-premium American bourbon, made in Lawrenceburg, Kentucky by Master Distiller Jimmy Russell. Forward guidance is a market feed programme by which feral hogs can increase market volatility and trading volumes. Dialling back, is a wish that Bernanke would make a few telephone calls before making a few market calls. After all, we all love to hedge, even Fed chiefs.
Back to the ONS stats, by the end of 2012, the economy was some 11% below trend rate at a cost to the economy of some £200 billion in lost output and a cost to Treasury of over £80 billion in lost revenue.
Hence the challenge of the spending review this week. The Chancellor obliged to cut a further £15 billion from spending in 2015/16. Radical changes to the level and composition of public spending will continue but spending cuts will achieve little without significant economic growth.
For a more detailed analysis check out the IFS web site. In the absence of growth, the IFS warn that further consolidation may require tax rises and spending cuts to hit the targets in the future.
Furthermore there appears to be little boost to infrastructure spending, according to Paul Johnson Director of the IFS, “What the Chancellor, did not announce was an increase in public sector net investment. Despite the hype net capital spending is not set to rise”.
Jonathan Portes and the Krugmanites will just love that.
What happened to sterling?
Sterling fell further on dollar strength to 1.5220 from 1.5425 and slipped against the euro to 1.1687 from 1.1757. The Euro dollar closed at 1.302 from 1.3115 and against the Yen, the dollar closed up 99.12 from 97.8.
Oil Price Brent Crude closed at $102.16 from $101. Average prices in June were some 9% higher than June 2012.
Markets, The Dow closed up 14,910 from 14,799. The FTSE closed at 6,215 from 6,116. Markets have rallied from lows, could be time to average in.
UK Ten year gilt yields closed at 2.46 from 2.42, US Treasury yields closed down at 2.49 from 2.54. The feral hogs will have their say. Yields are set to move higher.
Gold closed down at $1, 232 from $1293. Worshippers of the old relic at a loss, as we begin the exodus from Planet ZIRP.
Check out The Saturday Economist web site, and the new Chart of the Day Page. That’s all for this week, don’t miss The Sunday Times and Croissants out tomorrow. The Saturday Economist.com is mobile friendly, no need for a special app any more!
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The material is based upon information which we consider to be reliable but we do not represent that it is accurate or complete and it should not be relied upon as such. We accept no liability for errors, or omissions of opinion or fact. In particular, no reliance should be placed on the comments on trends in financial markets. The presentation should not be construed as the giving of investment advice.