The London Olympics and the UK economy

Nick Potts/PA Wire

The London Olympics are now underway, but against a backdrop of a recession now confirmed in the UK (regardless of the misreporting in a dreadful  New York Times article yesterday which stated that the country was on the verge of one).

Despite the extra spending in the run up to the Olympic games, Q2 of 2012 was the 3rd consecutive quarter of negative economic growth, with a decline of 0.7% compared with the previous quarter and a decline of nearly 0.8% compared to the same quarter a year ago.  The decline was clearly due to a 5.2% decline in the construction industry, which tells you that even though the Olympic building spree was in its final stages in the last quarter, other construction was clearly in heavy decline.  Why is this?  Partially because of the heavy budget cuts in terms of the UK coalition government's plans to balance the budget sooner rather than later (as in the US).  Although the UK Prime Minister, David Cameron, has stated that his government will now act to stimulate the economy, quite how this will be done is still unclear.

Here are some charts that show how bad the UK economy is faring right now.  The first shows real GDP growth using a year on year methodology.  It is clear that after a bounce back once the deep recession of 2008-09 had occurred, growth hit just over 2% and then has declined ever since.

Source: UK ONS   Calculations by me!

Despite this downtrend in growth, up until now the UK coalition has held to it's guns that it's economic priority must be to slash government spending and get it's levels of debt down.  And yet when you look at UK debt it is not that bad - a lower level in terms of % of GDP than the US or the euro area.

This can be clearly seen in some great analysis done by Matteo Radaelli which is reproduced in tablular form below

Source: Matteo Radaelli

What the table shows is that UK government debt is not the problem - if anything it is household debt that is the problem. In fact the net stimulus given to the UK economy in the major downturn was not that much considering that debt in the UK was already considerably higher than it was in the US. Also given that UK households are correcting their debt levels in the same way as US households have, then private savings rates have likely increased, given that also the future is uncertain and house prices have been falling. So in other words, it is no wonder the UK has gone into a double dip recession as the squeeze is on in both the public and the private sector. This is completely the opposite to what has been happening in the US where public spending has offset the private squeeze and has led to a modest economic recovery.

So the question is "what happens next?", as there is a "fiscal cliff" now looming in the US whereby if the leaders of the 2 parties cannot agree on increasing the debt ceiling, large cuts will occur in public spending next January. Some might think that the US has done enough of a stimulus so that The rosy scenario is that the US has done sufficient stimulus to boost global growth, the euro area comes out of its malaise and never-ending crises, and hopefully the UK government will U-turn sufficiently to weather any fiscal retrenchment in the US. But the likelihood of this happening is not high.  The UK therefore needs to do more than quantitative easing on the monetary side to lift the economy out of recession.  Some imaginative public infrastructure spending is needed - hopefully spending that will boost economic growth in the future.  Looking at the congestion on the highways in the UK, adding extra lanes everywhere would be a good start!