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The growth report – an economic health check for January

February 1, 2011

A few weeks ago I sketched five reasons why the UK economy is going to struggle to grow this year.  To me, these aren’t reasons to despair, but reasons to ask more questions about growth in the first place. Like a dog chasing its tail, pursuing growth in a fully developed, over-consuming society is a waste of energy and ultimately futile.

Since infinite growth in a finite universe is illogical, I believe a post-growth economy is actually inevitable sooner or later. We’ll get there eventually, hopefully by planning it and steering ourselves there, rather than ending up there by painful default. The occasional growth reports that I put together here are really a sort of check-up on our progress, intentional or otherwise, towards that post-growth society.

So in review, here’s January’s economic health check on the UK economy.

  • The Office of National Statistics recently announced its latest quarterly growth statistics, and Britain’s economy shrank by 0.5% in the last three months of 2010. This was due in large part to a severely cold December, but growth would have been “flattish” even without that.
  • New inflation figures were also released, clocking in at 3.7%. This too was higher than anyone expected. Since wages have stagnated, it means that we’d actually be getting poorer as individuals even if the economy was growing.
  • Inflation means there’s too much money in the system, which is counter-intuitive when the banks are apparently reluctant to lend. The way to control inflation is to raise the price of money – the interest rate. That’s still being held at a record low at the moment of 0.5%. This is a huge dillemma for the monetary committee. If they raise interest rates, it will be more expensive to invest, and low investment means lower job creation at just the time when the government needs aggressive expansion to offset its budget cuts.
  • The FAO’s Food Price Index is at an all time high, and the price of oil tipped back towards $100 a barrel because of concerns over Egypt’s stability (and thus access to the Suez Canal).
  • Data from this morning shows the average house price falling o.1% in January.

In response to this welter of bad news the government has promised a “budget for growth” in March.

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5 Comments leave one →
  1. Bill Clarke permalink
    February 1, 2011 1:07 pm

    I am dubious about inflation being too much money in the system.

    How can that be when practically everyone is short of cash and has to borrow? – and there is a credit crunch?

    It’s more likely that the the fact that businesses are short of cash and have to borrow and then struggle to pay back capital and interest. To recoup what is, in effect, a loss, they raise their prices. That is inflationary.

    Domestic inflation today is caused by the rise in global commodity prices and the falling exchange rate of the pound. So they are sold on the domestic market with higher prices. That is inflationary.

    • February 2, 2011 4:48 pm

      True, scarcity is a big factor in inflation at the moment. It’s clearly demand that is driving the oil price, for example. I say there is too much money because it has been too easy to borrow, meaning the money supply has run ahead of economic growth. The property market over the last decade was the biggest problem, pumping new money into the economy through mortgages without the rising incomes to pay for them. We’re in the hangover of an easy-money decade.

  2. February 2, 2013 9:15 pm

    This economic masochism is unnecessary and damaging. The underlying health of the UK economy is much better than the forecasts suggest; and the scope for action is considerably greater. Over the past two decades – up to and including the recession – productivity grew faster in the UK than in any other G7 economy. While a small part of that reflects the growth of the financial sector, most was due to improvements in the UK labour market, a higher skilled workforce, and a more competitive economy. But the OBR is arguing that over the next two years, potential productivity will only grow at about half that rate, and that we will make up little or none of the output lost in the recession. This is a self-fulfilling prophecy: if we believe it, it will be true. But it doesn’t have to be.

    • February 3, 2013 8:58 am

      This was written in January 2011, and I think it was entirely right to be sceptical about claims of a swift recovery. The situation is different today.

  3. November 26, 2013 11:31 pm

    It is often said that petroleum energy is the lifeblood of modern civilization: the indisputable driver of the unprecedented development and prosperity the world has experienced over the past century. But how can that precious energy source translate effectively into economic growth and higher living standards in the very nations that are blessed with an abundance of oil and gas? When we review the performance of oil-producing countries in attaining broad economic development, we find mixed results. Of course all host countries, whether developed or developing, are driven by budgetary needs to maximize tax revenues from their petroleum resources. While taxation is necessary, I believe it is insufficient to achieve desired development objectives. The development of oil and gas resources depends more on capital than labour, and exporting oil and gas neither generates maximum returns from these precious resources nor creates large numbers of jobs within the local economy. As a result, the benefits are typically not shared broadly across society.

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