Economic Update: November 2009 Professor Joe Nellis Andrew Kirchner Welcome to the November economic update with Professor Joe Nellis. Now, Joe, lots of things to discuss this month: UK GDP, very disappointing figures, ‐0.4% in Quarter 3. What is your reaction? Joe Nellis This was a shock. Most analysts were expecting perhaps zero growth, or some positive growth – very slightly positive. But this was a shock. A drop of point four per cent in GDP means that now the recession in terms of from peak to trough, we have had a fall of around about 6% in total. That is significant given that in the whole of the 1990s, the recession we had then, the fall was 2.5%. So this is by far in a way the longest and deepest recession since official records began in 1955. Andrew Kirchner There seems to be a mismatch between the survey data, the various indices coming out and the official stats. Are they lagging? Joe Nellis There is a lagging effect here in that generally business confidence and consumer confidence is picking up; but of course, confidence is a forward looking indicator whereas GDP figures, they are backward looking. And of course these figures that were released they are about six weeks after the end of Q3. We are already into Q4 and the signs are that things are beginning to improve. Andrew Kirchner We are lagging behind Germany, France, the US; what is the reason? Joe Nellis We certainly are lagging behind them: we are now the sick man of Europe and of the world in a sense in terms of the industrial world. You have got to remember that our banking sector, financial services, is a huge part of our economy – a significant part of our economy. And it has taken a knock, as we know, and restructuring in that sector will take several years to materialise. And so the scale of the restructuring has meant that the stimulus package takes more time to impact on the economy and to ripple through the economy. I think we are lagging behind, but I think it is a measure of just how sick we are. Andrew Kirchner Do you think we are going to be positive in Q4 and what is your forecast for 2010? Joe Nellis Let me be honest, I hope we are positive; am I optimistic? I am cautiously optimistic. We thought Q3 was going to be the turning Knowledge Interchange Online© Cranfield University November 2009 1 Professor Joe Nellis
point, but look a turning point must come at some stage and with the other signs that we mentioned about consumer confidence and business confidence we do expect to see a turning point in Q4. But I am not that excited in terms of growth prospects. So going into 2010, the Chancellor in the Budget earlier this year was talking of growth figures of 3.5% for the year ahead; I just don’t see it. There are too many negatives that are going to pull growth down; in particular tax increases – well, they are coming. And they are going to keep on coming. Government expenditure is being squeezed and will keep on being squeezed. I don’t see 2010 being any more than modest growth – and to hedge my bets, between 1 and 2 percent I think would be a realistic forecast. I do not expect growth to be at trend or above trend, which would take it above 2.6% ‐ I think that is too optimistic. Andrew Kirchner Is there still a possibility of a double dip? Joe Nellis There is a real possibility of that; and I see no reason to doubt that given, as I have said already, the tax increases in the pipeline, the government expenditure cuts in the pipeline and of course at some time in the future interest rates will go up; they can’t remain at 0.5% indefinitely. So I think, yes, we should be prepared for the possibility – and for the likelihood – of a double dip. But because we are preparing for it, let’s hope we avoid it of course. Andrew Kirchner The MPC starts its monthly meeting tomorrow and commentators are saying that we are going to see an increase in quantitative easing. Now, is the policy working? And if so, are we going to see more? Joe Nellis Difficult question to answer; is it working, because clearly the signs are very weak that it is working. But if you throw enough money at the economy, eventually it will stimulate spending and therefore recovery. So I would say it is working, but we are going to need some more. So I do expect to see more quantitative easing; and that also means, naturally, that the cost of money will remain low. Interest rates are not going to change for some time. You don’t pump more money in and at the same time make it more expensive – that just isn’t logical. So is it working? Yes, but its slow and we are disappointed by that. Andrew Kirchner Let’s look at the global picture; USA, good GDP figures for Q3 ‐ +3.5%, manufacturing output on the rise. It’s looking good. © Cranfield University November 2009 2 Professor Joe Nellis
Joe Nellis The USA is looking better; that is a fair point. But remember they have had exceptional stimulus package, exceptional policy stimuli through their government spending especially things like the so‐
called ‘cash for clunkers’ programme – the scrappage scheme that we have in the UK. And that has pulled forward consumer spending. Of the 3.5% growth in GDP, which is an annualised figure – let’s be careful – 2.4% of that percentage points is actually consumer spending. The other good news, as you said, manufacturing has improved in the US and in particular housing construction has reported a positive growth for the first time since 2005, which is really good news. So the US is on the recovery path and recovering quite strongly. Whether that will continue? The same issues apply there as here, of course, in terms of future tax increases. Andrew Kirchner The Asian economies seem to be doing very well. Joe Nellis Steaming ahead is the phrase that is being used, especially China of course. Growth is now back to what it would expect to be at – round about 8, 9, 10%, that sort of figure. Yes, there is no doubt China is the engine of the world economy at the moment, but that engine of course relies on the world recovering, particularly America and the Western economies. So the US recovery is great for China; US demand for Chinese exports is pulling China along. But also China itself as an economy is in good shape – good shape compared to many other economies. So the internal economy in China helping growth there as well. Andrew Kirchner So, summing up Joe, would you say you are cautiously optimistic for the world economy? Joe Nellis I am, but more cautious than I expected to be at this time say six months. We did expect 2009 to be a difficult year; we said that several times. It has been a difficult year, perhaps even more difficult that I and other commentators expected. Which leads me to believe that 2010 we shouldn’t be over‐optimistic, but cautiously optimistic is the appropriate phrase. Andrew Kirchner Joe, thank you very much for your time this morning, © Cranfield University November 2009 3