We know two things about economic growth in a developed economy like the UK: it is positive over the longer term, but highly volatile in the short term. We can refer to these two facts as the twin characteristics of growth. The volatility of growth sees occasional recessions, i.e. two or more consecutive quarters of declining output. Since 1973, the UK has experienced six recessions.
Here we consider in a little more detail the growth numbers for the UK from the latest Quarterly National Accounts, focusing on the depth and duration of these six recessions. How do they compare?
The latest figures on British economic growth show that the UK economy grew by 0.9 per cent in the third quarter of 2012. However, when compared with the third quarter of 2011, output was essentially unchanged. This means that the annual rate of growth was zero. Perhaps even more telling is that output (real GDP) in Q3 2012 was still 3.0 per cent below its Q1 2008 level.
The chart helps to put the recent output numbers into an historical context. It shows both the quarter-to-quarter changes in real GDP (right-hand axis) and the level of output as measured by GDP at constant 2009 prices (left-hand axis). It captures nicely the twin characteristics of growth. Since 1970, the average rate of growth each quarter has been 0.6 per cent. This is equivalent to an average rate of growth of 2.35 per cent per year. The chart also allows us to pin-point periods of recessions.
One way of comparing recessions is to compare their ‘2 Ds’: depth and duration. The table shows the number of quarters each of the six recessions since 1973 lasted. It also shows how much smaller the economy was by the end of each recession. In other words, it shows the depth of each recession as measured by the percentage reduction in output (real GDP).
British recessions
Duration (quarters)
Depth (output lost, %)
1973Q3–74Q1
3
3.25
1975Q2–75Q3
2
1.76
1980Q1–81Q1
5
4.63
1990Q3–91Q3
5
2.93
2008Q2–09Q2
5
6.28
2011Q4–12Q2
3
0.90
We can see that three of the recessions lasted for five quarters. In the case of the recessions starting in 1975 and 2011 they occurred very shortly after a previous recession. Hence, we observe two so-called double-dip recessions.
The table reveals that the deepest recession by some distance was that in the late 2000s. As a result of this recession, UK output declined by 6.3 per cent. As the recent GDP numbers show, the UK has yet to recover the ‘lost output’ that followed the financial crisis.
While the Western world has struggled with economic growth for the past 6 years, emerging economies such as China, Brazil and India have recorded some very high rates of growth. Throughout 2012, there were signs that these economies were not going to be the saviour of the global economy that we all thought. But, as we enter 2013, is it these economies that still hold the hope of the West for more positive figures and better economic times?
The article below from BBC News, in particular, considers the year ahead for the Asian economies and what it might mean for the Western world. Although these countries are by no means safeguarded against the impending approach of the US economy to their fiscal cliff or the ongoing eurozone crisis, they have seemed to be more insulated than the rest of the world. A crucial question to consider is whether this will continue. Furthermore, are the growth levels and policies of a country such as China sustainable? Can it continue to record such high growth rates in the face of the global economic situation?
The Japanese economy has been in serious trouble for a couple of decades, but measures to boost growth for this economy are expected. If these do occur, then western economies may feel some of their positive effects. At present, there is a degree of optimism as we enter the New Year, but how long this will last is anybody’s guess. The following articles consider the year ahead.
Why have the Asian economies been more insulated to the global economic conditions over the past few years, in comparison with the Western world?
What challenges will the global economy be facing over the coming year?
What challenges are the Asian economies facing? How different are they from the challenges you identified in question 3?
Why is the rate of exchange an important factor for an economy such as Japan?
What does a low exchange rate for the yen mean for European countries? Is it likely to be seen as a good or bad thing? What about for South Korea? Use a diagram to help you answer this question.
Why is the economic situation in countries such as China and India so important for the rest of the global economy? Use a diagram to illustrate this.
The UK is an island-economy. Therefore, trade is a crucial determinant of our economic performance. The competitiveness of our exports, in part, is affected by the exchange rate. Floating exchange rates are notoriously volatile. However, since the autumn of 2007 we have observed a significant depreciation of the UK exchange rate. In other words the number of units of many foreign currencies to the British pound has fallen. A depreciation helps to make our exports more competitive abroad. We detail the extent of this depreciation and any signs of a reversal in this pattern.
Rather than look at the British pound (or any currency) against the many foreign currencies separately we can look at the average exchange rate against a whole bundle of currencies. The average rate is calculated by weighting the individual exchange rates by the amount of trade between Britain and the other countries. This trade-weighted exchange rate is known as the effective exchange rate.
In analysing the competitiveness of the exchange rate, we can go one step further and adjust for the terms of trade. This means that we adjust for the average price of our exports relative to the average price of those goods we import. Therefore, as well as the nominal (actual) effective exchange rate we can calculate a real effective exchange rate. If the average price of our exports rises relative to the average price of imports, the real effective exchange rate rises relative to the nominal rate. It means that we are able to obtain a larger volume of imports from selling a given volume of exports.
The chart shows the nominal (actual) and real effective exchange rate for the British pound since 2002. The chart shows clearly how from the autumn of 2007 the effective exchange rate both in nominal and real terms began to fall sharply. Over the period from September 2007 to January 2009 the nominal effective exchange rate fell by 26 per cent. After adjusting for the relative price of exports to imports, we find the real effective exchange rate fell by 24 per cent. In other words, the British pound depreciated by close to one-quarter in just 16 months.
If we move the clock forward, we observe a mild appreciation of the British pound since July 2011. In nominal terms, the effective exchange rate has appreciated by 6.8 per cent while in real terms it has appreciated by 7.8 per cent. Nonetheless, if we compare September 2007 with October 2012, we find that the nominal effective exchange rate for the British pound is 19 per cent lower while the real effective exchange rate is approximately 13 per cent lower. This still constitutes a major competitive boost for our exporters.
Explain how the foreign demand for goods and assets generates a demand for British pounds. How will this demand be affected by the foreign currency price of the British pound, i.e. the number of foreign currency units per £1?
Explain how the demand by British residents for foreign goods and assets generates a supply of British pounds. How will this supply be affected by the foreign currency price of the British pound, i.e. the number of foreign currency units per £1?
What factors are likely to shift the demand and supply curves for British pounds on the foreign exchange markets?
Illustrate the effect of a decrease in the demand for British goods and assets on the exchange rate (i.e. the foreign currency price of the British pound) using a demand-supply diagram.
What is the difference between a nominal and a real effective exchange rate? Which of these is a better indicator of the competitiveness of our country’s exports?
China has been one of the success stories of the past 20 years, with rapid growth in domestic and export demand. This has created the second largest economy in the world. From 1992 to 2007 annual GDP growth averaged 10.7% and annual export growth averaged 18.9% (see chart).
However, with the credit crunch and ensuing recession, growth rates in China have fallen somewhat. Annual GDP growth has averaged 9.6% and annual export growth has averaged 7.4%. Such growth rates may not seem bad, given that many Western economies have been struggling to achieve any growth, but they have been causing concern for this booming economy.
In its May Outlook, the World Bank forecast China’s growth for the year at 8.2%, but it has since been reduced to 7.8%. A key part of China’s success story has been its export market, but it has been this market that has caused concerns for the mainland economy. In August of this year, its year-on-year export growth was at only 2.7%, but exports last month grew by more than expected, at approximately 7.4%. China has had a consistent trade surplus and according to government figures, this has widened to $27.67 billion in September from $26.66 billion in the previous month.
Recovery in this market will be crucial for the continued success of the economy, as a means of alleviating the fears of a slowdown. This higher growth of exports may be a misleading indicator, perhaps influenced by seasonal factors and thus may not be a sign of what’s to come. Indeed, many analysts have said that they are not convinced that these healthier trade figures will remain. Alistair Thornton, from IHS Global Economics said:
“It’s safe to say we are overshooting the trend here and we expect (the data) to come back in line in the months ahead.”
Citigroup economist, Ding Shaung also confirmed these sentiments:
”The trade data is a positive sign for the Chinese economy … But it remains to be seen whether import and export growth can remain at these levels.”
Part of this pessimism is due to the uncertainty surrounding the growth prospects of its biggest two trading partners – the US and the European Union. Exports to the former have remained relatively high, but exports to the European Union have suffered, falling by over 5.6%. It is likely that weaknesses in the global economy have held back China’s growth prospects in both exports and national output. The Chinese government was aiming for growth of 7.6% in 2012. Not a bad rate you may say, but when compared with growth rates for 2011 (9.3%) and 2010 (10.4%), it does represent a significant fall. The future of the Chinese economy is crucial for the recovery of the world economy, in part as it represents a big demand for imports from other countries, such as the US and Europe. The following articles consider the trade and growth prospects of the world’s second largest economy.
Which factors have influenced Chinese exports and imports?
Why is China’s growth rate such an important variable for the UK and other Western economies?
Why has export growth in China fallen recently? Can you use the same explanation for its lower growth in national output?
Explain why analysts remain pessimistic about the sustainability of these improved trade figures.
Using a diagram, illustrate the effect that higher Chinese growth rates will have on GDP in a country such as the UK. Could there be a multiplier effect?
Germany is the world’s fourth largest economy and Europe’s largest. Part of its strength has come from its exports, which last year increased by 11.4% to $1.3 trillion – the first time it had ever exceed the $1 trillion mark. Germany, however, is by no means the country with the largest export sector – that mantle was taken from them by China, whose exports rose 20.3% last year to reach $1.9 trillion.
At the same time as exports have been rising from Germany, imports have also increased, showing a recovery in domestic demand as well. Despite this, Germany’s foreign trade surplus increased slightly to €158.1 billion (from €154.9 billion).
However, in the last month of 2011, its export growth did slow – the fastest drop in nearly 3 years – and that is expected to signal the trend for 2012. As the eurozone debt crisis continues to cause problems, German exports have been forecast to grow by only 2% this year, with economic growth expected to be as low as 0.7%. This is a marked change from last year, where the Germany economy grew by some 3%. Help for the eurozone is unlikely to come form Europe’s second largest economy, France, where growth in the first 3 months of 2012 is expected to be zero and figures have shown a widening trade deficit, with issues of competitiveness at the forefront. The following articles look at Germany’s prowess in the export market and the likely developments over the coming year.
Briefly examine some of the factors that may have contributed to Germany’s rising exports throughout 2011.
How has the eurozone debt crisis impacted the Germany economy and in particular the export sector?
The articles that look at France refer to a growing trade deficit, with competitiveness being a key issue. What is meant by competitiveness and why is the French economy suffering from a lack of it?
Does France’s membership of a single currency reduce its ability to tackle its competitiveness issues?
Why is German growth expected to remain sluggish throughout 2012? Given that Germany is a member of the eurozone, what government policies are open to the government to boost economic growth?
China has overtaken Germany as the largest exporter, with growth of 20.3% in 2011. What factors have allowed Chinese exports to grow so quickly?
We know two things about economic growth in a developed economy like the UK: it is positive over the longer term, but highly volatile in the short term. We can refer to these two facts as the twin characteristics of growth. The volatility of growth sees occasional recessions, i.e. two or more consecutive quarters of declining output. Since 1973, the UK has experienced six recessions.
The chart helps to put the recent output numbers into an historical context. It shows both the quarter-to-quarter changes in real GDP (right-hand axis) and the level of output as measured by GDP at constant 2009 prices (left-hand axis). It captures nicely the twin characteristics of growth. Since 1970, the average rate of growth each quarter has been 0.6 per cent. This is equivalent to an average rate of growth of 2.35 per cent per year. The chart also allows us to pin-point periods of recessions. 
