The strength of the housing market is often a key indicator of the strength of the economy. But, the opposite is also true: a weak economy often filters through to create a weak housing market. With the current weak economy, a boost in confidence is needed and signs suggest that the housing market is beginning to recover.

While the picture of the housing market today is nothing like the pre-crisis view, things are beginning to look up. For a couple of years now, house price inflation in the UK has been very close, if not equal to zero. However, data from Nationwide Building Society suggests that in May, house prices rose by 0.4% and the once stagnant year-on-year change in house prices rose to 1.1% (see chart below: click here for a PowerPoint of the chart). This is the fastest it has grown since the end of 2011.

Commentators have suggested that this latest data is an indication that ‘the market is gaining momentum’. A further confirmation of this rejuvenated market came with the data that property sales were 5% up each month this year, than the average monthly level for 2012. Despite this improvement, they still remain well below the pre-crisis levels.

Which factors have contributed to this tentative recovery? Most households require a mortgage to purchase a house and, given the central role that the housing market played in the financial crisis with companies engaging in excessive lending as a means of expanding their mortgage books, the availability of mortgages fell. The number of mortgage approvals is likely to feed through to affect the number of house sales and these have improved in the first few months of 2013. Interest rates offered by lenders have also fallen, making mortgages more affordable, thus boosting demand. Furthermore, government assistance is available to help individuals put a deposit down on a house, by offering them an equity loan. Further measures are due to come into effect in January 2014, with the aim of providing a further boost to the housing market. The chief economist at Nationwide, Robert Gardner said:

Widespread expectations that the economy will continue to recover gradually in the quarters ahead, that interest rates will remain low, and the ongoing impact of policy measures aimed at supporting the availability and lowering the cost of credit all provide reasons for optimism that activity will continue to gain momentum in the quarters ahead.

Despite the optimism, the situation is different across the UK, with some areas benefiting more than others. London and the South-East are driving this 0.4% rise, whereas other areas may be in need of further assistance to keep pace (see The UK housing market: good in parts).

Although these latest data may be a sign of things to come, it is also possible that things could go the opposite way. Incomes remain low; employment data are hardly encouraging; and the spectre of inflation is always there. Perhaps most importantly, consumer confidence remains fragile and until that gains momentum, uncertainty will continue to plague the UK marketplace. The following articles consider this issue.

Articles
UK house prices again up in May, says Nationwide The Guardian, Hilary Osborne (30/5/13)
Housing market could boost retail industry, Kingfisher says The Telegraph, Graham Ruddick (30/5/13)
UK house prices see modest rise, says Nationwide BBC News (30/5/13)
Hugh’s Review: House prices in spotlight BBC News, Hugh Pym with Yolande Barnes of Savills and Matthew Pointon of Capital Economics (31/5/13)
House prices are racing ahead as stimulus for the market kicks in Independent, Russell Lynch (31/5/13)
’Pick up’ in house prices recorded in sign of market confidence, says Nationwide Independent, Vicky Shaw (30/5/13)
House prices at highest level for nearly two years as confidence in UK economy grows and mortgages get cheaper This is Money, Matt West (30/5/13)
Stamp duty is ‘choking’ housing market as it rises seven times faster than inflation over last 15 years Mail Online, Tara Brady (28/5/13)
Nationwide launches Help to Buy mortgages The Telegraph, William Clarke (29/5/13)
UK home prices rise most in 18 months, Nationwide says Bloomberg, Jennifer Ryan (30/5/13)

House price data
Links to house price data The Economics Network
Statistical data set – Property transactions Department of Communities and Local Government
Nationwide house price index Nationwide Building Society
Halifax House Price Index Lloyds Banking Group
Lending to individuals – November 2012 Bank of England

When you are next in town shopping, just keep in mind that consumer spending accounts for a little over 60 per cent of GDP. Therefore, consumption is incredibly important to the economy. How consumers behave is crucial to our short-term economic growth. The second estimate of British growth from the Office for National Statistics shows that the economy expanded by 0.3 per cent in the first three months of 2013. This follows a 0.3 per cent decline in the final quarter of 2012. Real household expenditure rose by just 0.1 per cent in Q1 2013. However, this was the sixth consecutive quarter in which the volume of purchases by households has grown.

The growth in the economy is measured by changes in real GDP. Chart 1 shows the quarter-to-quarter change in real GDP since Q1 2008. (Click here to download a PowerPoint of the chart). During this period the economy is thought to have contracted in 10 of the 21 quarters shown. Furthermore, they show a double-dip recession and so two periods in close proximity where output shrank for two or more quarters. While more recent output numbers are frequently revised, which could see the double-dip recession possibly ‘statistically wiped’ from history, the period since 2008 will always been one characterised by anemic growth. The average quarterly growth rate since Q1 2008 has been -0.12 per cent.

Chart 2 shows from Q1 2008 the quarterly growth in household expenditure in real terms, i.e. after stripping the effect of consumer price inflation. (Click here for a PowerPoint of the chart). Over the period, the volume of household consumption has typically fallen by 0.18 per cent per quarter. Hence, consumption has feared a little worse than the economy has a whole.

While the annualised rate of growth for the economy since Q1 2008 has averaged -0.47 per cent that for consumer spending has averaged -0.73 per cent. However, these figures disguise a recent improvement in consumer spending growth. This is because the volume of consumption has in fact grown in each of the six quarters since Q4 2011. In contrast, the economy has grown in only 2 of these quarters. It is, of course, much too early to start trumpeting consumption growth has heralding better times, not least because the 0.1 per cent growth in Q1 2013 is the weakest number since positive consumption growth resumed at the back end of 2011. Nonetheless, the figures do deserve some analysis by economists to understand what is going on.

A slightly less promising note is struck by the gross fixed capital formation (GFCF) numbers. These numbers relate to the volume of investment in non-financial fixed assets, such as machinery, buildings, office space and fixtures and fittings. Chart 3 shows the quarterly growth in the volume of GFCF since Q1 2008. (Click here for a PowerPoint of the chart). The average quarterly rate of growth over this period has been -0.77 per cent. This is equivalent to an annual rate of decline of 3.9 per cent. GFCF has risen in only 7 of these quarters, declining in the remaining 14 quarters.

Worryingly, gross fixed capital formation has decreased in each of the last three quarters. While these figures may reflect continuing difficulties encountered by businesses in obtaining finance, they may also point to lingering concerns within the business community about the prospects for sustained growth. Therefore, it is important for economists to try and understand the drivers of these disappointing investment numbers and, hence, whether it is these or the slightly better consumption numbers that best hint at our short-term economic prospects.

Data
Second estimate of GDP, Q1 2013 Office for National Statistics
Second Estimate of GDP, Q1 2013 Dataset Office for National Statistics

Articles
UK GDP: concerns about underlying economy as 0.3pc growth confirmed Telegraph, Philip Aldrick (23/5/13)
UK investment fall among worst in G8 Guardian, Phillip Inman (23/5/13)
UK first-quarter growth unchanged BBC News (28/5/13)
U.K. Economy Grows 0.3% on Inventories, Consumer Spending Bloomberg, Svenja O’Donnell (23/5/13)
Surge in consumer spending kept UK out of recession The Telegraph (28/5/13)
Boost in service sector activity The Herald, Greig Cameron (28/5/13)
Hopes dashed as household spending rises by just 0.1% The Herald, Ian McConnell (24/5/13)

In the blog The global economy we considered the economic performance of countries across the globe, including the UK. In the first estimate of UK economic growth for the first quarter of 2013, the economy grew at 0.3%, thus avoiding a triple-dip recession. This first estimate is always subject to change, but in this case, the data was confirmed.

The April 2013 figure provided by the ONS of 0.3% growth has been confirmed, once again indicating the slow recovery of the UK economy. Despite these more positive signs for the economy, the IMF has raised concerns of the weak performance of the UK and has urged the government to invest more in projects to stimulate growth. Although the economy has started to grow, economic growth has continued to remain weak since the onset of the financial crisis and recession. Martin Beck, an economist at Capital Economics said:

With employment and average earnings both dropping in the first quarter on their level in the previous quarter, the foundations for a sustained recovery, even one driven by consumers, still look pretty rickety.

Initial estimates by the ONS are always updated and there is still time for the 0.3% growth figure to be changed, as more data becomes available. (Click here for a PowerPoint of the chart.) This latest figure, although unchanged, has given a more concrete indication of where the UK economy is continuing to struggle. Consumer spending increased by only 0.1%, investment and exports declined, but in further signs of a weak economy, the building up of stocks by companies was a big contributor to the UK economic growth – a contribution of 0.4 percentage points. The service sector continued to growth with a 0.6 percentage point contribution to GDP.

So, what does the future look like for the UK? Although the estimate of 0.3% figure did prevent a triple-dip recession and the IMF did comment on the ‘improving health’ of the economy, signs of recovery remain weak.

Crucial to the recovery will be government spending, but more than this, the government spending must be in key growth industries. Data suggests that the UK invests less than other G8 countries as a percentage of GDP and this is perhaps one of the key factors that has prevented the UK recovery from gathering pace. The future of the UK economy remains uncertain and government policy will be crucial in determining this future course. The following articles consider the latest growth data.

Signs of weakness mar UK economic growth Reuters, Olesya Dmitracova and William Schomberg (23/5/13)
UK first quarter growth unchanged BBC News (23/5/13)
Concerns over underlying health of UK economy as 0.3% growth confirmed The Guardian, Philip Inman (23/5/13)
Statisticians confirm 0.3% UK growth for first quarter of 2013 Financial Times, Claire Jones and Sarah O’Connor (23/5/13)
UK GDP: concerns about underlying economy as 0.3pc growth confirmed The Telegraph, Philip Aldrick (23/5/13)
Britsh economy returns to growth in first quarter The Economic Times (23/5/13)
U.K. households not loosening purse strings Wall Street Journal, Ainsley Thomson and Ilona Bllington (23/5/13)
IMF: UK should push for economic growth BBC News (22/5/13)

Have you ever woken in the night worrying about your finances? Most of us have. Our overall financial position undoubtedly exerts influence on our spending. Therefore, we would not expect our current spending levels to be entirely determined by our current income level.

Our financial health, or what economists call our net financial wealth, can be calculated as the difference between our financial assets (savings) and our financial liabilities (debt). Between them, British households have amassed a stock of debt of £1.423 trillion, almost as much as annual GDP, which is around £1.5 trillion (click here to download the PowerPoint.) We look here at recent trends in loans by financial institutions to British households. We consider the effect that the financial crisis and the appetite of individuals for lending is having on the debt numbers.

There are two types of lending to individuals. The first is secured debt and refers to loans against property. In other words, secured debt is just another name for mortgage debt. The second type of lending is referred to as unsecured debt. This covers all other forms of loans involving financial institutions, including overdrafts, outstanding credit card debt and personal loans. The latest figures from the Bank of England’s Money and Credit show that as of 31 March 2013, the stock of debt owed by individuals in the UK (excluding loans involving the Student Loans Company) was £1.423 trillion. Of this, £1.265 billion was secured debt while the remaining £157.593 billion was unsecured debt. From this, we can the significance of secured debt. It comprises 89 per cent of the stock of outstanding debt to individuals. The remaining 11 per cent is unsecured debt.

The second chart shows the growth in the stock of debt owed by individuals (click here to download the PowerPoint chart). In January 1994 the stock of secured debt stood at £358.75 billion and the stock of unsecured debt at £53.774 billion. 87 per cent of debt then was secured debt and, hence, little different to today. The total stock of debt has grown by 246 per cent between January 1994 and March 2013. Unsecured debt has grown by 197 per cent while secured debt has grown by 253 per cent.

However, more recently we see a different picture evolving, more especially in unsecured debt. Since October 2008, the monthly series of the stock of unsecured debt has fallen on 47 occasions and risen on only 7 occasions. In contrast, the stock of secured debt has fallen on only 12 occasions and often by very small amounts. Consequently, the stock of unsecured debt has fallen by 23.2 per cent between October 2008 and March 2013. In contrast, the stock of secured debt has risen by 3.5 per cent. The total stock of debt has fallen by 0.4 per cent over this period.

Another way of looking at changes in the stock of debt is to focus on what are known as net lending figures. This is simply the difference between the gross amount lent in a period and the amount repaid. The net lending figures will, of course, mirror changes in the total debt stock closely. For example, a negative net lending figure means that repayments are greater than gross lending. This will translate into a fall in the stock of debt. However, some difference occurs when debts have to be written off and not repaid.

The third chart shows net lending figures since January 1994 (click here to download the PowerPoint chart). The chart captures the financial crisis very nicely. We can readily see a collapse of net lending by financial institutions to households. It is, of course, difficult to disentangle from the net lending figures those changes driven by changes in the supply of credit by financial institutions and those from changes in the demand for credit by individuals. But, we can be certain that the enormous change in credit levels in 2008 were driven by a massive reduction in the provision of credit.

To further put the net lending figures into context, consider the following numbers. Over the period from January 2000 to December 2007, the average amount of monthly net lending was £8.52 billion. In contrast, since January 2009 the average amount of net lending has been £691 million per month. Consider too the composition of this net lending. The average amount of net secured lending between January 2000 and December 2007 was £7.13 billion per month compared with £1.39 billion for net unsecured lending. Since January 2009, monthly net secured lending has averaged only £756 million while monthly net unsecured lending has averaged -£64.4 million. Therefore, repayments of unsecured lending have outstripped gross unsecured lending.

While further analysis is needed to fully understand the drivers of the net lending figures, it is, nonetheless, clear that the financial system of 2013 is very different to that prior to the financial crisis. This change is affecting the growth of the debt stock of households. This is most obviously the case with unsecured debt. The stock of unsecured debt in March 2013 is 24 per cent smaller than in its peak in September 2008. It is now the job of economists to understand the implications of how the new emerging patterns in household debt will affect our behaviour and overall economic activity.

Data
Money and Credit – March 2013 Bank of England
Statistical Interactive Database Bank of England

Articles
Bank of England extends lending scheme Financial Times, Chris Giles (24/4/13)
Markets insight: Europe and the US lines cross on household debt ratio Financial Times, Gillian Tett (9/5/13)
British families are the deepest in debt Telegraph, James Kirkup (14/5/13)
Total property debt of British households stands as £848bn Guardian, Hilary Osborne (13/5/13)
Household finances reach best level in three years – but are stuck below pre-crisis levels This is Money.co.uk, Matt West (17/5/13)
ONS says Welsh households have lowest debts in Britain BBC News (28/1/13)

The link below is to an article by Bill Gates, founder of Microsoft. He argues that per-capita GDP is a poor indicator of development, especially in Sub-Saharan Africa.

The problems with using GDP as an indicator of the level of development of a country are well known and several alternative measures are in common use. Perhaps the best known is the United Nations Development Programme’s Human Development Index (HDI), where countries are given an HDI of between 0 and 1. HDI is the average of three indices based on three sets of variables: (i) life expectancy at birth, (ii) education (a weighted average of (a) the mean years that a 25-year-old person or older has spent in school and (b) the number of years of schooling that a 5-year-old child is expected to have over their lifetime) and (iii) real gross national income (GNY) per capita, measured in US dollars at purchasing-power parity exchange rates (see Box 27.1 in Economics 8th edition for more details).

But although indicators such as this capture more elements of development than simple per-capita GNP or GNY, there are still serious shortcomings. A major problem is the lack of and inaccuracy of statistics, especially when applied to the rural subsistence and informal urban sectors. The problem is recognised and some countries are trying to address the problem (see the second article below), but the problem is huge. As Gates says:

It is clear to me that we need to devote greater resources to getting basic GDP numbers right. … National statistics offices across Africa need more support so that they can obtain and report timelier and more accurate data. Donor governments and international organisations such as the World Bank need to do more to help African authorities produce a clearer picture of their economies. And African policymakers need to be more consistent about demanding better statistics and using them to inform decisions.

Another problem is how you convert data into internationally comparable forms. For example, how are inflation, exchange rates, income distribution, the quality of health provision and education, etc. taken into account?

How GDP understates economic growth The Guardian, Bill Gates (8/5/13)
States’ GDP computation report out soon, says Nigeria statistics bureau Premium Times (Nigeria), Bassey Udo (9/5/13)
Michael Porter Presents New Alternative to GDP: The Social Progress Index (SPI) Triple Pundit, Raz Godelnik (13/4/13)

High levels of government debt and the adverse effect this has on the economy has been a key influencing factor in the fiscal consolidation efforts across the world. A key factor providing evidence in support of the connection between high government debts and low economic growth was a paper by two Harvard economists. However, the data used in their research has been called into question.

As we saw in a previous post, It could be you, Carmen Reinhart and Kenneth Rogoff presented a paper back in January 2010. Their research suggested that when a country’s debt increases above 90% of GDP, economic growth will slow considerably. (Click here for a PowerPoint of the above chart.) As you might expect, given the timing of this research, policymakers were intrigued. For those governments in favour of cuts in government spending and increases in taxation to bring the government debt down, this research was dynamite. It seemed to provide the evidence needed to confirm that if left to grow, government debt will have a significantly adverse effect on growth. Here was evidence in favour of austerity.

But, did a simple error create misleading information? A student at the University of Massachusetts Amherst was trying to replicate the results found by Reinhart and Rogoff, but was unable to do so. Thomas Herndon contacted the Harvard professors and they sent him the spreadsheets they had used in their calculations. Looking through it, an error in calculating the average GDP was spotted. However, the student and his supervisors also engaged in further research and came across other inconsistencies. This led to a draft working paper being published in April. The paper did find the same correlation between high debt levels and low growth, but the outstanding results found by Reinhart and Rogoff disappeared. Responding to the error, the Harvard professors said:

We are grateful to Herndon et al. for the careful attention to our original Growth in a Time of Debt AER paper and for pointing out an important correction to Figure 2 of that paper. It is sobering that such an error slipped into one of our papers despite our best efforts to be consistently careful. We will redouble our efforts to avoid such errors in the future. We do not, however, believe this regrettable slip affects in any significant way the central message of the paper or that in our subsequent work.

So, how might this correction and the implications affect government policy? Are we likely to see a reversal in austerity measures? Only time will tell.

Articles
Seminal economic paper on debt draws criticism Wall Street Journal, Brenda Cronin (16/4/13)
Reinhart, Rogoff … and Herndon: The student who caught out the Profs BBC News, Ruth Alexander (20/4/13)
Reinhart and Rogoff publish formal correction Financial Times, Robin Harding (8/5/13)
The 90% question The Economist (20/4/13)
Reinhart and Rogoff correct austerity research error BBC News (9/5/13)
Harvard’s Reinhart and Rogoff publish formal collection CNBC, Robin Harding (9/5/13)
Rogoff and Reinhart should show some remorse and reconsider austerity The Guardian, Heidi Moore (26/4/13)
The buck does not stop with Reinhart and Rogoff Financial Times, Lawrence Summers (5/5/13)
Meet Carmen Reinhart and Kenneth Rogoff, the Harvard professors who thought they had austerity licked – and Thomas Herndon, the student who proved them wrong Independent, Tim Walker (22/4/13)

Papers
Growth in a time of debt American Economic Review (May 2010)
Does high public debt consistently stifle economic growth? A critique of Reinhart and Rogoff Political Economy Research Institute, Herndon, Ash and Pollin (April 2013)

Interest rates have, for some years, been the main tool of monetary policy and of steering the macroeconomy. Across the world interest rates were lowered, in many cases to record lows, as a means of stimulating economic growth. Interest rates in the UK have been at 0.5% since March 2009 and on 2nd May 2013, the ECB matched this low rate, having cut its main interest rate from 0.75%. (Click here for a PowerPoint of the chart.)

Low interest rates reduce the cost of borrowing for both firms and consumers and this in turn encourages investment and can boost consumer expenditure. After all, when you borrow money, you do it to spend! Lower interest rates will also reduce the return on savings, again encouraging spending and for those on variable rate mortgages, mortgage payments will fall, increasing disposable income. However, these above effects are dependent on the banks passing the ECB’s main interest rate on its customers and this is by no means guaranteed.

Following the cut in interest rates, the euro exchange rate fell almost 2 cents against the dollar.

Interest rates in the eurozone have been at 0.75%, but a 0.25 point cut was widely expected, with the ongoing debt crisis in the Eurozone continuing to adversely affect growth and confidence. A lack of trust between banks has also contributed to a lack of lending, especially to small and medium sized enterprises. The ECB has injected money into financial institutions with the aim of stimulating lending, but in many cases, banks have simply placed this extra money back with the ECB, rather than lending it to other banks or customers. The fear is that those they lend to will be unable to repay the money. In response to this, there have been suggestions of interest rates becoming negative – that is, if banks want to hold their money with the ECB they will be charged to do it. Again, the idea is to encourage banks to lend their money instead.

Small and medium sized businesses have been described as the engine of growth, but it is these businesses who have been the least able to obtain finance. Without it, they have been unable to grow and this has held back the economic recovery. Indeed, GDP in the Eurozone has now fallen for five consecutive quarters, thus prompting the latest interest rate cut. A key question, however, will be how effective this quarter of a percent cut will be. If banks were unwilling to lend and firms unwilling to invest at 0.75%, will they be more inclined at 0.5%? The change is small and many suggest that it is not enough to make much of a difference. David Brown of New View Economics said:

The ECB rate cut is no surprise as it was well flagged by Draghi at last month’s meeting. Is it enough? No. The marginal effect of the cut is very limited, but at least it should have some symbolic rallying effect on economic confidence.

This was supported by Howard Archer at HIS Global Insight, who added:

Admittedly, it is unlikely that the trimming of interest rates from 0.75% to 0.5% will have a major growth impact, especially given fragmented credit markets, but any potential help to the eurozone economy in its current state is worthwhile.

Inflation in the eurozone is only at 1.2%, which is significantly below the ceiling of 2%, so this did give the ECB scope for the rate to be cut. (Click here for a PowerPoint of the chart.) After all, when interest rates fall, the idea is to boost aggregate demand, but with this, inflation can emerge. Mr Draghi said ‘we will monitor very closely all incoming information, and assess any impact on the outlook for price stability’. The primary objective of the ECB is the control of inflation and so had inflation been somewhat higher, we may have seen a different decision by the ECB. However, even then, 5 consecutive quarters of negative growth is hard to ignore.

So, if these lower interest rates have little effect on stimulating an economic recovery, what about a movement away from austerity? Many have been calling for stimulus in the economy, arguing that the continuing austerity measures are stifling growth. The European Council President urged governments to promote growth and job creation. Referring to this, he said:

Taking these measures is more urgent than anything … After three years of firefights, patience with austerity is wearing understandably thin.

However, Mr. Draghi urged for policymakers to stick with austerity and continue to focus on bringing debt levels down, while finding other ways to stimulate growth, including structural reform. The impact of this latest rate cut will certainly take time to filter through the economy and will very much depend on whether the 0.5% interest rate is passed on to customers, especially small businesses. Confidence and trust within the financial sector is therefore key and it might be that until this emerges, the eurozone itself is unlikely to emerge from its recession.

ECB ready to enter unchartered waters as bank cuts interest rate to fresh low of 0.5pc The Telegraph, Szu Ping Chan (2/5/13)
Draghi urges Eurozone governments to stay the course on austerity Financial Times, Michael Steen (2/5/13)
Eurozone interest rates cut to a record low of 0.5% The Guardian, Heather Stewart (2/5/13)
ECB’s Draghi ‘ready to act if needed’ BBC News (2/5/13)
Eurozone interest rates cut again as ECB matches Bank of England Independent, Russell Lynch (3/5/13)
Margio Draghi urges no let-up in austerity reforms after Eurozone rate cut – as it happened The Guardian, Graeme Wearden (2/5/13)
ECB cuts interest rate to record-low 0.5% in desperate measure to drag Eurozone out of recession Mail Online, Simon Tomlinson and Hugo Duncan (2/5/13)
ECB cuts interest rates, open to further action Reuters, Michael Shields (2/5/13)
Eurozone loosens up austerity, slowly Wall Street Journal (2/5/13)
ECB cuts interest rate, not enough to pull the region out of recession The Economic Times of India (2/5/13)
Euro steady ahead of ECB interest rate announcement Wall Street Journal, Clare Connaghan (2/5/13)
European Central Bank (ECB) cuts interest rates BBC News (2/5/13)
All eyes on ECB as markets expect rate cut Financial Times, Michael Steen (2/5/13)

In The global economy we note the mixed picture contained within the latest British growth numbers. With the first estimate of growth for Q1 of 2013 pointing to an increase in real GDP of 0.3 per cent, the UK economy appears to have missed the ignominy of a triple dip recession. However, the overall economy remains fragile with different sectors of the economy performing quite differently.

A patchy picture is perhaps the fairest assessment. This helps to explain the quite different perceptions amongst economists, business people, journalists and the wider public about the current state of the economy. Here we consider in a little more detail the growth numbers for the UK from the latest preliminary GDP estimates. (Click here for a PowerPoint of the chart).

The British economy is thought to have grown by 0.3 per cent in the first quarter of 2013. This follows a contraction of 0.3 per cent in the final quarter of 2012. Compared with the first quarter of 2012, the output of the British economy was 0.6 per cent higher. However, as Chart 2 helps to show, the British economy has some way to go before it returns to the levels seen prior to the financial crisis. Real GDP peaked in the first quarter of 2008 when GDP at 2009 prices was estimated at £372.7 billion. In the first quarter of 2013, GDP at constant 2009 prices is estimated at £362.9 billion. This means that the economy is still 2.6 per cent smaller than its 2008-peak. Click here for a PowerPoint of the chart.

The patchy nature of British growth is illustrated nicely by the contrasting rates of growth across the different industrial sectors in the first quarter of the year. While service sector output rose by 0.6 per cent, output across the production industries rose by only 0.2 per cent and agricultural output declined by 3.7 per cent. Within the production industries, mining and quarrying output rose by 3.2 per cent, but manufacturing output shrunk by 0.3 per cent and construction output shrunk by 2.5 per cent.

Chart 3 compares the output of agriculture, the production industries and the service sector between the first quarter of 2008 and the first quarter of 2013. (Click here for a PowerPoint of the Chart). It shows the dramatically different experience of the service sector compared with agriculture and the production industries. While output in the service sector is now 0.8 per cent higher, output across agriculture and the production industries is almost 13.5 per cent lower. Within the production industries, output in mining and quarrying is 38 per cent lower, in the construction sector 19 per cent lower and 10 per cent lower in manufacturing. It is perhaps not surprising then that we get such different messages about the state of the economy. The devil really is in the detail.

Data
Preliminary Estimate of GDP – Time Series Dataset Q1 2013 Office for National Statistics
Statistical Bulletin: Gross Domestic Product Preliminary Estimate Q1 2013 Office for National Statistics

Articles
UK avoids triple-dip recession with better-than-expected 0.3% GDP growth Guardian, Heather Stewart (25/4/13)
UK economy shows 0.3% growth Financial Times, Claire Jones (25/4/13)
UK avoids triple-dip recession with 0.3pc GDP growth Telegraph, Szu Ping Chan (25/4/13)
Osborne claims UK economy is ‘healing’ Financial Times, George Parker and Claire Jones (25/4/13)
UK narrowly escapes triple-dip recession as GDP figures show 0.3% growth in first three months of year Independent, Ben Chu (25/4/13)
UK economy avoids triple-dip recession BBC News (25/4/13)

The latest growth data for the UK is somewhat difficult to interpret. It’s positive, but not that positive. The Conservatives say it shows that the economy is moving in the right direction. Labour suggests it is evidence that the Coalition’s policies are not working. With a return to positive growth, the UK has avoided the triple dip recession and here we take a closer look at the economic performance of other key nations.

In the final quarter of 2012, the US economy grew at 0.4%, but in the 3 months to March 2013, economic growth in America picked up to 2.5%. Consumer spending significantly increased, growing at an annualized rate of 3.2%, according to the Commerce Department. This figure helped boost the growth rate of the US economy, as consumer spending accounts for around two thirds of economic activity.

However, the growth figure was lower than expected, in part due to lower government spending. Furthermore, there are suggestions that the positive consumer spending figures are merely a positive blip and spending will fall as the US economy moves through 2013.

If this does prove to be the case in the USA, it will do little to further boost UK economic growth, which was recorded at 0.3% for the first 3 months of 2013. The Chancellor has said that the growth figures are encouraging and are evidence that the government’s policies are working.

Today’s figures are an encouraging sign the economy is healing … Despite a tough economic backdrop, we are making progress. We all know there are no easy answers to problems built up over many years, and I can’t promise the road ahead will always be smooth, but by continuing to confront our problems head on, Britain is recovering and we are building an economy fit for the future.

While the USA and UK have recorded positive growth, expectations of growth throughout Europe remain uncertain. Spain has revised its forecasts downwards for 2013, expecting the economy to shrink by over 1%. Even after 2013, growth is expected to remain very weak, forecast to be 0.5% in 2014 and 0.9% in 2015. To make matters worse, Spain’s unemployment continues to move in the wrong direction, with data for the first 3 months of 2013, recording an unemployment rate of 27.2% – the highest on record.

However, it’s not just Spanish unemployment that is on the rise. Figures for March show that in France, 3.2 million people were out of work, a 1.2 % rise compared to February. In the UK, 2.56 million people were recorded as unemployed, representing just under 8% of the working population. The German economy continues to outperform its European partners, but eurozone growth continues to look weak for the rest of 2013.

Despite much bad news in Europe, growth in other parts of the world remains buoyant. South Korea has recorded economic growth that is at its highest level in 2 years. Economic growth was just under 1%, but construction and investment both increased, perhaps a sign of an economy starting its recovery.

The Chinese economy has seemed relatively unaffected by the economic downturn, yet its economic growth has slowed. Averaging over 10% per annum for the last decade, the growth for January – March 2013 was only 7.7%. This is a decline on the previous 3 months and is lower than expected. If the Chinese economy does begin to slow (relatively speaking), this could present the global economic recovery with an unwelcome obstacle.

Many Western economies are reliant on exports to boost their growth figures and with such high demand in China, this is a key export market for many countries. If the Chinese economy continues to slow, consumer spending may even fall and this could mean a reduction in Chinese imports: that is, a reduction in other countries’ exports to China. However, for China’s competitors, the news is better, as with China’s move from a low to middle-income country, other countries will now see an opportunity to grasp a competitive advantage in the production of cheaper products. David Rees from Capital Economics said:

Trade data show that Chinese imports of commodities, and industrial metals in particular, have been falling in recent months … That is bad news for those emerging markets in Latin America, the Middle East, and Africa that predominately export commodities to China. It is not all bad news … To the extent that China’s structural slowdown reflects its transition from low to middle-income status, opportunities will present themselves for other EMs as China moves up the value chain. We are particularly upbeat on the manufacturing-based economies of South East Asia, along with Mexico, Poland, and Turkey.

News is better in Japan, where growth forecasts have been raised to 2.9% over the same period and the economy is expected to grow by 1.5% throughout both 2013 and 2014. Furthermore, suggestions that inflation may also reach 0.7% have boosted confidence. This might be the end of Japan’s troubles with deflation.

So, we have something of a mixed picture across the world, although the IMF predicts a global rate of growth of 3.5% for 2013, which would be an improvement on 2012 figures. The following articles consider the global situation.

Spain slashes economic growth forecast Sky News (26/4/13)
UK avoids triple-dip recession with better than expected 0.3% GDP growth The Guardian, Heather Stewart (26/4/13)
US economy grows 2.5% on buoyant consumer spending BBC News (26/4/13)
Poor French and Spanish jobs data but UK economy returns to growth – as it happened The Guardian, Graeme Wearden and Nick Fletcher (25/4/13)
UK economy avoids tiple-dip recession with 0.3pc GDP growth The Telegraph, Szu Ping Chan (25/4/13)
South Korea economic growth hits two year high BBC News (25/4/13)
S. Korea economy grows at the fastest pace in two years Bloomberg, Eunkyung Seo (25/4/13)
Spain revises down its economic forecast BBC News (26/4/13)
US economy sees broad growth Financial Times, Robin Harding (25/4/13)
Germany’s private sector shrinks as Eurozone decline continues – as it happened The Guardian, Graeme Wearden and Nick Fletcher (23/4/13)
China economic growth lower than forecast BBC News (15/4/13)
China’s slowing economy: what you need to know Bloomberg Business Week, Dexter Roberts (25/4/13)
Modest Growth Pickup in 2013, Projects IMF International Monetary Fund (23/1/13)

An excellent learning exercise for students of economics is to take a journal article that uses data to model the economy and then try to replicate the authors’ results. You may well be given an assignment like this in future years of your degree.

One such exercise is used on the University of Massachusetts Amherst’s doctoral programme in economics. Thomas Herndon is a student on that degree and chose to examine a well-known and highly influential paper, Growth in a Time of Debt by Carmen Reinhart then of the University of Maryland and Kenneth Rogoff of Harvard University and former chief economist of the IMF. Professors Reinhart and Rogoff used new data on 44 countries spanning about 200 years.

A key finding of their paper, published in 2010 in the American Economic Review Papers and Proceedings, is that once a country’s government debt exceeds 90% of GDP, growth rates fall considerably: the median across countries by about 1% and the mean considerably more.

The paper has been hugely influential. It has been used to justify the austerity programmes being pursued in many countries, including the UK and the eurozone. Cutting the government deficit to GDP ratio, and ultimately the government debt to GDP ratio, has been seen as a way of achieving higher growth over the longer term, and justifies the adverse effect on short-term growth from the dampening of aggregate demand.

Well, this seemed an interesting paper for Thomas Herndon to examine, and he was keen to show just how Reinhart and Rogoff’s data led to their conclusions. But try as he might, he could not replicate their results. His initial reaction was to think he had made an error, but each time he checked he came back with the same conclusion: they must have made errors in their calculations.

His supervisor at Amherst, Professor Michael Ash, after Thomas had checked and checked again, realised that something was wrong. He encouraged Thomas to write to Reinhart and Rogoff to request sight of their dataset. They duly obliged and it was then that Thomas spotted various errors. These are explained in the articles below, but the overall effect was to alter the conclusion. Although high debt may undermine growth to some extent, the effect is much less than Reinhart and Rogoff concluded, and there are several exceptions to this rule.

On 15 April 2013, Thomas, along with his supervisor, Michael Ash and his colleague, Robert Pollin, published a response to the Reinhart and Rogoff paper. In the abstract to their paper, Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff they state that:

… coding errors, selective exclusion of available data, and unconventional weighting of summary statistics lead to serious errors that inaccurately represent the relationship between public debt and GDP growth among 20 advanced economies in the post-war period. They find that when properly calculated, the average real GDP growth rate for countries carrying a public-debt-to-GDP ratio of over 90 percent is actually 2.2 percent, not –0:1 percent as published in Reinhart and Rogoff. That is, contrary to RR, average GDP growth at public debt/GDP ratios over 90 percent is not dramatically different than when debt/GDP ratios are lower.

The authors also show how the relationship between public debt and GDP growth varies significantly by time period and country. Overall, the evidence we review contradicts Reinhart and Rogoff’s claim to have identified an important stylized fact, that public debt loads greater than 90 percent of GDP consistently reduce GDP growth.

So could this be you in the future? Will you take a famous paper and, by re-examining and reworking the data, find that its conclusions are wrong? Could you end up changing the world? Exciting stuff!

Podcasts
Austerity: A Spreadsheet Error? BBC, More or Less, Tim Harford (20/4/13)
Austerity justification study ‘inaccurate’ BBC Today Programme, Robert Pollin (18/4/13)

Articles
UMass Student Exposes Serious Flaws in Harvard Economists’ Influential Study The Atlantic Wire, J.K. Trotter (18/4/13)
Shocking Paper Claims That Microsoft Excel Coding Error Is Behind The Reinhart-Rogoff Study On Debt Business Insider, Mike Konczal (16/4/13)
How a student took on eminent economists on debt issue – and won Economic Times of India (19/4/13)
Meet the 28-Year-Old Grad Student Who Just Shook the Global Austerity Movement New York Magazine, Kevin Roose (19/4/13)
An economist’s mea culpa: I relied on Reinhart and Rogoff Confessions of a Supply-Side Liberal blog, Miles Kimball (22/4/13)
The Rogoff-Reinhart data scandal reminds us economists aren’t gods The Guardian, Heidi Moore (18/4/13)
Reinhart, Rogoff… and Herndon: The student who caught out the profs BBC News Magazine, Ruth Alexander (20/4/13)
George Osborne’s case for austerity has just started to wobble The Guardian, Polly Toynbee (18/4/13)
The error that could subvert George Osborne’s austerity programme The Guardian, Charles Arthur and Phillip Inman (18/4/13)
The Excel depression Sydney Morning Herald, Paul Krugman (19/4/13)
Europe: Retreat from austerity BBC News, Gavin Hewitt (23/4/13)

Guest post by Thomas Herndon
The Grad Student Who Took Down Reinhart And Rogoff Explains Why They’re Fundamentally Wrong Business Insider, Thomas Herndon (22/4/13)

Papers
Growth in a Time of Debt NBER working paper, Carmen M. Reinhart and Kenneth S. Rogoff (January 2010)
Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff PERI Working Paper 322, Thomas Herndon, Michael Ash and Robert Pollin (April 2013)