Eurozone Deteriorates

source: Office of National Statistics (pdf):

Preliminary statistics last week showed the UK in an official recession. GDP statistics may be slightly revised upwards at a later date. But, at this stage even very low economic growth is not good. It will lead to continued unemployment and persistently lower living standards. By comparison the recovery from the Great Depression was much faster!

However, though things may be bad in the UK, in southern Europe it is a real depression. 

Statistics from Greece, showed retail sales fell by 13.0% in February, in volume terms…” - It's hard to over-emphasis how dramatic this fall of 13% is.

Spain also entered into double dip recession with 0.3% fall in GDP

 

In main blog of week I looked at likelihood of a Eurozone break-up. - Will Eurozone break up?

There are two fundamental problems

1. Imbalances in Eurozone - different competitiveness causing structural current account deficits and lower growth in overvalued south.

 

 

 

2. Austerity isn't Working

 

source: Krugman. Link between changes in austerity measures and GDP

The main policy of Europe has been to try and implement radical budget targets which have caused unsustainable levels of unemployment. Deflationary fiscal policy has been deflationary.

Spanish unemployment hit 24.4% last Friday (April 2012)

This is the big political issue for Europe - what can they do to reduce excessive unemployment?

Will Eurozone break up?

1970s Revisited?

I was watching the very good TV programme about the 1970s. 1973-74 was one of the most turbulent years in British economic history - a boom and bust, rapid inflation, strikes, a 3 day week, petrol rationing - even the first experiments with credit cards, leading to our first credit binge and later bust. There were few things the 1970s didn't have. (Economy of the 1970s)

 

30 years later and there are some unwelcome parallels. Persistent stagflation (inflation + negative growth) Rising oil prices, a much more serious credit binge and consequent debt recovery.

In some ways, things aren't as bad as the 1970s. Inflation of 3.5% is not comparable to the inflation of 20%. The current threat of a petrol blockade is pretty insignificant compared to the actual reality of a three day week. TV off at 10.30pm. Life was very different.

But, at least, the 1970s didn't have such a persistent recession and mass unemployment.

Double Dip Recession

Figures published by ONS today, show that the UK is officially in a double dip recession. Some may wave the figures away saying it is only small fall - and it is just because of a big fall in construction. But, it is remarkable and worrying to see such a prolonged fall in GDP. (Bear in mind the UK's long run trend rate is 2.5%) But, GDP is still lower than in the 2008 peak. That's three years of falling living standards.

More on double dip recession

IMF Bailout

The 1970s, was also a time when the UK needed its only IMF bailout (UK national debt was only around 75% of GDP). These days, the IMF have much bigger challenges than a relatively small debt of 75%. The big concern for the IMF is that even a firewall of £1 trillion does nothing to tackle the underlying problems of the Eurozone.

• Purpose of IMF rescue Fund

Scottish Independence

The discovery of oil in the north Sea during the 1970s, was a factor in contributing to the re-emergence of Scottish nationalism. Economics looks to be the decisive issue in swaying whether people will vote for independence.

• This is a brief look at economic consequences of Scottish independence.

The Economy of the 1970s

See previous decade - 1960s.

The 1970s was not just an era of dayglow trousers, lava lamps and the emergence of punk rock. It was a traumatic economic decade of stagflation, a three day week and the return of unemployment. Yet, despite some headline grabbing crisis - it was also a decade of rising living standards, the growth of credit and rising property prices.

Graph showing combination of high inflation and volatile output.

Barber Boom 1970-73

 The early years of the 1970s, were a period of rapid economic growth.

1. The Bank of England deregulated the mortgage market - meaning High Street Banks could now lend mortgages (not just local building societies). This helped fuel a rise in house prices and consumer wealth.
2. Barber Boom of 1972. In the 1972 budget, the chancellor Anthony Barber made a dash for growth - with large tax cuts against a backdrop of high economic growth.
3. Growth of Credit. It was in the 1970s, we saw the first mass use of credit cards (Access). This helped create a consumer bubble.

Inflation Crisis

By 1973, inflation in the UK was accelerating to over 20%. This was due to:

• Rising wages, partly due to strength of unions
• Inflationary budget of 1972.
• Growth in credit and consumer spending
• Oil price shock of 1973, leading to 70% increase in oil prices.

Trying to Deal With Inflation

Belatedly, the government tried to deal with unemployment, through higher interest rates. Also, the Heath government tried capping wages. This was fuel for industrial unrest, leading to frequent and widespread strikes. In 1973, the miners went on strike and were also joined by sympathetic trades unionists - led by, amongst others, the young and infectiously strident Arthur Scargill. Growing up in Thatcher's Britain, it is hard to remember how powerful trades unions actually were at the time. During Heath's government 9 million working days were lost to strike action - plus more to practises such as 'working to rule'. Flying pickets successfully blocked coal and coke factories, which at the time produced the majority of the nation's power. Suddenly the life source of Britain's energy was being blocked. At the height of the strike, Britain was on a 3 day week, with the Prime Minister, Edward Heath making public appeals to conserve energy.

1974, also saw an unwelcome return of a real recession. This recession was caused by the end of the Barber boom and falling living standards from rising prices. In the post war period, we had booms and busts, but, the bust were relatively mild, with only very minor declines in output. But, in 1974, output fell 3.4% causing a return of high unemployment not seen since the 1930s.


Oil Prices in 1970s

• blue line - nominal oil prices
• Yellow line - Real oil prices, adjusted for inflation

Since oil had become an intrinsic part of the economy, we had taken it for granted that oil could be bought cheaply. The 1960s and early 1970s, saw a rapid rise in ownership of cars and motoring. Britain enthusiastically embraced the motor car - helped by rising incomes and cheap petrol.

But, the 1973 oil crisis, changed all that. Suddenly the price of petrol more than doubled and the UK faced an energy crisis to go along with a spike in inflation. The government seemed powerless as Britain was put on a three day week and TV was turned off at 10.30pm. Emergency speed limits were introduced to conserve petrol.

If in 1957, we had never had it so good, by 1973, it seemed we had never had it so bad. It was a return to the 1940s austerity; but with no obvious enemy, the public were less forgiving of this inconvenience.

1976 IMF Bailout

In 1976, the UK needed to apply to the IMF for a bailout. This was due to high budget deficit and also concerns over value of Sterling. Markets believed Sterling was overvalued and so kept selling. This caused the Pound to depreciate.

Britain asked the IMF for a £2.3bn bail out in 1976 saying unemployment and inflation were at exceptional levels. IMF Briefing

In return the IMF insisted on deep spending cuts to tackle the budget deficit. The government implemented spending cuts. By 1977, the economy showed signs of recovery, and helped by oil revenues the balance of payments improved. The pound also strengthened after the loan. The UK did not need to drawout the full loan. IMF loan at National Archives

Recent Inflation Graph and blog posts

I have been updating a different economics blog.

What would a world without oil look like?

Debt spirals explained - the situation facing many EU countries

Why is current recession so severe?

What is the long run trend rate of economic growth? - has it been reduced in UK since recession?


Inflation in the UK remains relatively high given the state of the economy. Latest UK inflation