The eurozone recorded 0.0% growth in the second quarter of 2014. While the UK and USA are now experiencing relatively buoyant economic growth, the eurozone as a whole is stagnating. Some of the 18 eurozone countries, it is true, are now growing, including Spain, Portugal, Ireland and the Netherlands. But the German and Italian economies contracted in the three months to the end of June, while France experienced zero growth.
This will put growing pressure on the ECB to introduce quantitative easing (QE) through the direct purchase of government bonds or other assets. Although this has been a key policy of many central banks, including the Bank of England, the Fed and the Bank of Japan, up to now the ECB has focused mainly on providing cheap funds to banks to encourage them to lend and keeping interest rates very low.
In June, the ECB did announce that it would explore the possibility of QE. It would also introduce €400 billion worth of targeted long-term lending to banks (targeted longer-term refinancing operations (TLTROs)), and would cease sterilising the extra liquidity injected through the Securities Markets Programme, which involved the purchase of existing bonds on the secondary market.
These plans and their implications are examined in the blog post, The ECB: tackling the threat of deflation.
But even if it does eventually introduce QE, this is unlikely before 2015. However, the first €200 billion of TLTROs will be introduced in September and the remaining €200 billion in December. The ECB hopes that these measures in the pipeline will give a sufficient stimulus to rekindle economic growth. But increasingly there are calls for something more dramatic to be done to prevent the eurozone as a whole slipping back into recession.
Articles
Eurozone economy grinds to halt even before Russia sanctions bite Reuters, Michelle Martin and Martin Santa (14/8/14)
ECB under pressure to boost growth, analysts say BBC News (14/8/14)
Eurozone growth at zero as Germany slumps, France stagnates Deutsche Welle (14/8/14)
Eurozone crisis: The grim economic reality BBC News, Gavin Hewitt (14/8/14)
Eurozone growth splutters to a halt as crisis enters new phase The Guardian, Larry Elliott (14/8/14)
Eurozone can learn from George Osborne and Bank of England stimulus The Guardian, Larry Elliott (14/8/14)
Broken Europe: economic growth grinds to a standstill The Telegraph, Szu Ping Chan (14/8/14)
One-in-three chance the ECB conducts quantitative easing next year – Reuters Poll Reuters, Sumanta Dey (13/8/14)
Eurozone’s Unravelling Recovery: What’s Going Wrong Across Troubled Currency Bloc International Business Times, Finbarr Bermingham (14/8/14)
France calls on ECB to act as eurozone growth grinds to a halt The Guardian, Larry Elliott (14/8/14)
That sinking feeling (again) The Economist (30/8/14)
Data
GDP stable in the euro area and up by 0.2% in the EU28 eurostat euroindicators (14/8/14)
Statistics Pocket Book ECB
European Economy: links to data sources Economics Network
Euro area economic and financial data ECB
Questions
- Explain how quantitative easing works.
- Why has the ECB been reluctant to introduce QE?
- What is meant by sterilisation? Why did the ECB sterilise the effects of the assets purchased under the Securities Markets Programme? Why did it cease doing this in June?
- How have events in Ukraine and political reactions to them influenced the eurozone economy?
- Should QE be ‘fast tracked’? Would there be any dangers in this?
- What is the ‘Funding for Lending’ scheme in the UK? Is the planned introduction of TLTROs similar to Funding for Lending?
The most commonly used measure of economic performance is GDP and while there is agreement that it is an important and useful measure, there is also agreement that there are some big problems with it. Does it measure welfare or quality of life? What is and isn’t included? Do some things add to GDP which actually make us worse off?
One criticism often levelled at GDP is that there are many aspects that go unmeasured – often known as the underground economy. Some areas are typical everyday things – DIY, looking after your own children rather than paying someone to do it, or even giving yourself a haircut. But, there are other activities, often illegal, which go unrecorded, such as the selling and distribution of drugs and prostitution. In countries like the Netherlands, their GDP figures get a boost, as some drugs and prostitution are legal. In other countries, such data is not recorded and as such, the contribution of these markets is under-estimated or even completely omitted.
However, this aspect of the calculation of GDP statistics is changing across Europe, which will allow much easier and more meaningful comparisons of relative GDP across countries. This extra production will therefore offer a positive contribution towards our GDP and perhaps suggest to the untrained eye that the British economy is growing, which can only be good news. But, for the trained economist, we are looking at extra data being added, which will boost total output and the question will be does it really indicate that the economy is better off? The following articles consider this change to GDP.
Small data: The way drugs and prostitution boost the economy BBC News (4/4/14)
Small data: Calculating the sex and drugs economy BBC News (2/6/14)
UK economic output to be revised up after ONS updates BBC News, Anthony Reuben (10/6/14)
UK economic output will get near 5 percent boost from data changes Reuters (10/6/14)
Accounting for drugs and prostitution to help push UK economy up by £65bn The Guardian, Katie Allen (10/6/14)
Questions
- What does GDP measure? Is it good at measuring it?
- Explain the pros and cons of using GDP to measure the welfare of an economy.
- Why are there problems using GDP to compare output between countries?
- Is it a good idea to include markets such as sex and drugs in calculating a nation’s output?
- What other measures of welfare do we have?
The expansion of the BRIC economies has both advantages and disadvantages for Western countries. Their consistently high growth rates have created a much wider market place for Western firms and a much needed additional source of consumer demand, especially in times of recession. Countries such as China have had double digit growth rates, with others like India experiencing growth rates of just under 10%. But are these impressive growth rates now beginning to fall?
For the last 2 years, the growth rate in the Indian economy has been sub-5%, with growth in the 2013-14 financial year at 4.7%. Though some sectors, including agriculture have experienced buoyant growth, it is other sectors that have been holding this economy back. Manufacturing contracted at an annualised rate of 1.4% over the quarter, while mining contracted by 0.4%. With a growth rate of just under 5%, one might think that this was good – after all many Western economies have only recently entered positive growth. However, the Indian economy has a rapidly growing population and it is estimated that 10 million additional jobs each year must be created. It is this figure that requires such a high growth rate – estimated at around 8%. Thus, the sub-5% growth recorded for 2 years is insufficient to sustain the required job creation.
There are many factors that appear to be holding growth back. High inflation has been a problem for some years and the Indian currency has been relatively weak and volatile. Together, these issues have created an environment of uncertainty and if there’s one thing that investors don’t like, it’s uncertainty. This has therefore led to a lack of investment in the economy, which is a key component of aggregate demand and hence a key source of economic growth. Furthermore, interest rates rose last year, thereby pushing up the cost of borrowing and the rate of credit growth has also slowed. These factors collectively have led to lower foreign investment, domestic investment and spending, which have all contributed towards more subdued growth than in the past. Glenn Levine, a senior economist at Moody’s said:
India’s economy continues to grow well below potential as a combination of supply‐side constraints and the adverse effects of an underperforming government weigh on capital expenditure and hiring … It will be a while before the Indian economy is expanding above 6% again.
However, many economists remain optimistic about the prospects of Asia’s third-largest economy. Inflation appears to be under control and the currency has gained strength. Many believe that more investment supporting government policies will be the kick start the economy needs and this will in turn encourage firms to begin investment. It may be the new leader of this country, Narendra Modo, that will jump start the economy. The Prime Minister is expected to back policies to stimulate growth, who will direct more spending at infrastructure, simplify taxes and introduce policies to attract foreign investment. Adi Godrej, Chairman of the Godrej group said:
As soon as investors see the first signals of growth-supportive policies, you will see a definite turnaround on the ground.
The coming months will be crucial in determining how quickly the Indian economy is likely to see a return to near double digit growth. The new government has indeed promised policies to boost the economy, but the annual budget will confirm whether this promise is likely to be kept. Given the dependence of Indian jobs on a fast growth rate and the dependence of the Western world on the continued growth of the BRICs in creating a wider market for our exports, the fortunes of India are extremely important. The following articles consider this economy.
Indian economy grew at 4.7% in 2013-14 The Times of India (30/5/14)
India’s economic growth disappoints BBC News (30/5/14)
India’s GDP grows 4.7% in fiscal year, missing government forecast Wall Street Journal, Anant Vijay Kala (30/5/14)
India’s economy expands 4.7pct in fiscal year 2013/14 Reuters (30/5/14)
India’s economy still underwhelms CNN Money, Charles Riley, Alanna Petroff (30/5/14)
FY14 GDP growth at 4.7%; India sees worst slowdown in 25 years The Economic Times (30/5/14)
India growth below 5% adds pressure on Modi to spur investment Bloomberg, Unni Krishnan (30/5/14)
Jim Armitage: ‘Modinomics’ in India has helped growth, but not for all Independent, Jim Armitage (17/5/14)
Questions
- Using a diagram, explain how economic growth can be created through (a) demand-side measures and (b) supply-side measures.
- Why would higher interest rates reduce growth?
- Why does high inflation create uncertainty and what impact does this have on business investment?
- India has experienced a weak and volatile currency and this has contributed towards a lack of foreign investment and low growth. Using a diagram, explain why this could be the case.
- What sort of government policies would you recommend for the Indian economy if you had become the new Prime Minister and your primary objective was to boost economic growth?
- Why is the expansion of the BRIC economies, of which India is one, so important for Western economies?
The latest preliminary GDP estimates for 2014 Q1 suggest that the economy’s output (real GDP) expanded by 0.8 per cent following on the back of a 0.7 per cent increase in 2013 Q4. Growth was observed in three of the four main industrial sectors: 0.9% in services, 0.8% in production and 0.3% in construction. In contrast, output decreased by 0.7% in agriculture. The total output of the economy is now just 0.6 per cent below its 2008 Q1 peak with the output of the service sector now 2.0 per cent higher.
Data on growth need to be set in the context of the inherent volatility of economies and in this case in the context of 2008/9 recession. Then, output fall by some 7.2 per cent. UK output peaked in 2008 Q1 (£392.786 billion at 2010 prices). There then followed 6 quarters during which output declined.
Output declined again in 2010 Q4 (-0.2% growth), in 2011 Q4 (-0.1% growth), in 2012 Q2 (-0.4%) and in 2012 Q4 (-0.2%). A double-dip recession was only narrowly avoided with growth recorded at zero on 2012 Q1. The latest ONS numbers show the economy grew by 0.8 per cent in 2013 Q2 (to £381.318 billion at 2010 prices), by 0.8 per cent in 2013 Q3 (to £384.533 billion at 2010 prices), by 0.7 per cent in 2013 Q4 (to £387.138 billion at 2010 prices) and by 0.8 per cent in 2014 Q1 (to £390.235 billion at 2010 prices). Compared with 2013 Q1, the output of the UK economy in 2014 Q1 is 3.1 per cent higher.
Chart 1 helps to put the recent growth numbers into an historical context. It shows the quarterly change in real GDP since the 1980s. We can see the 5-quarter recession that commenced in 1980 Q1 when output shrunk by 4.6 per cent, the 5-quarter recession that commenced in 1990 Q3 when output shrank by 2.4 per cent and the 6-quarter recession that commenced in 2008 Q2 when output shrank by 7.2 per cent. (Click here to download the chart to PowerPoint.)
Chart 2 scratches a little below the surface by looking at output by the 4 principal industrial types. The interesting finding is that the output of the service sector has now risen above its 2008 Q1 peak. In 2014 Q1, service sector output was 2.0 per cent higher than 2008 Q1. The fact that total output remains 0.6 per cent lower can be explained by the lop-sided industrial recovery. Output in agriculture, forestry and fisheries remains 7.1 per cent lower, production (including manufacturing) 11.5 per cent lower and construction 12.2 per cent lower. (Click here to dowload the chart to Powerpoint.)
Data
Preliminary Estimate of GDP – Time Series Dataset Q1 2014 Office for National StatisticsGross Domestic Product Preliminary Estimate, Q1 2014 Office for National Statistics
Articles
UK GDP ‘close to pre-crisis level’ says NIESR BBC News (9/5/14)
UK ‘great recession’ almost over, says thinktank Guardian, Katie Allen (9/5/14)
UK economy tops its pre-crash high point, says NIESR Telegraph, Szu Ping Chan (9/5/14)
UK economy grew by 0.8% in first three months of 2014 Guardian, Katie Allen and Angela Monaghan (29/4/14)
Manufacturing is GDP star performer BBC News, Robert Peston (29/4/14).
Questions
- What is the difference between nominal and real GDP? Which of these helps to track changes in economic output?
- Looking at Chart 1 above, summarise the key patterns in real GDP since the 1980s.
- What is a recession? What is a double-dip recession?
- What are some of the problems with the traditional definition of a recession?
- Can a recession occur if nominal GDP is actually rising? Explain your answer.
- What factors lead to economic growth being so variable?
- What factors might explain the very different patterns seen since the late 2000s in the volume of output of the 4 main industrial sectors?
- Produce a short briefing paper exploring the prospects for economic growth in the UK over the next 12 to 18 months.
- Explain the arguments for and against using GDP as a measure of a country’s economic well-being.
- Analyse the role that the financial system might play in contributing to or alleviating the business cycle.
The IMF has just published its 6-monthly World Economic Outlook report. The report is moderately optimistic, arguing that ‘global activity has broadly strengthened and is expected to improve further in 2014–15’. World growth is expected to rise from 3.0% in 2013 to 3.6% in 2014 and 3.9% in 2015,
Much of the impetus for an acceleration in growth is expected to come from advanced countries. Growth in these countries is expected to average 2¼% in 2014–15, a rise of 1 percentage point compared with 2013. Part of the reason is that these countries still have large output gaps and thus have considerable scope to respond to rises in aggregate demand.
Monetary policy in advanced countries remains accommodative, although the USA has begun to taper off its quantitative easing programme. It is possible, however, that the ECB may make its monetary policy more accommodative, with signs that it might embark on quantitative easing if eurozone growth remains weak and if the risks of deflation rise. If the average price level in the eurozone does fall, this could dampen demand as consumers defer consumption until prices have fallen.
As far as emerging economies are concerned, growth is projected to ‘pick up gradually from 4.7 percent in 2013 to about 5 percent in 2014 and 5¼% in 2015’. Although predicted growth is higher in emerging countries than in advanced countries, its acceleration is less, and much of the predicted growth is dependent on rising export sales to the advanced countries.
Global growth, however, is still fragile. Emerging market economies are vulnerable to a slowing or even reversal of monetary flows from the USA as its quantitative easing programme winds down. Advanced countries are vulnerable to deflationary risks. ‘The result [of deflation] would be higher real interest rates, an increase in private and public debt burdens, and weaker demand and output.’
The UK is predicted to have the strongest growth (2.9%) of the G7 countries in 2014 (see above chart). But the IMF cautions about being too optimistic:
Growth has rebounded more strongly than anticipated in the United Kingdom on easier credit conditions and increased confidence. However, the recovery has been unbalanced, with business investment and exports still disappointing.
Articles
IMF: World economy stronger; recovery uneven USA Today, Paul Davidson (8/4/14)
Emerging markets feel the pressure The Telegraph, Szu Ping Chan (8/4/14)
IMF cuts downturn danger to near zero Financial Times, Chris Giles (8/4/14)
IMF warns eurozone and ECB on deflation threat RTE News (8/4/14)
Recovery strong but risk shifts to emerging markets: IMF CNBC, Kiran Moodley (8/4/14)
IMF: World economy is stronger but faces threats Bloomberg Businessweek, Christopher S. Rugaber (8/4/14)
IMF: UK economic growth to reach 2.9% in 2014 BBC News (8/4/14)
IMF: UK economic growth to reach 2.9% in 2014 BBC News, Hugh Pym (8/4/14)
Five signs that the global economic recovery may be an illusion The Guardian, Larry Elliott (6/4/14)
Report and data
World Economic Outlook (WEO) International Monetary Fund (8/4/14)
World Economic Outlook Database IMF (8/4/14)
Questions
- Why does the IMF expect the world economy to grow more strongly in 2014 and 2015 than in 2013?
- What are the greatest risks to economic growth for (a) advanced countries; (b) developing countries?
- What geo-political events could negatively affect economic growth in (a) the eurozone; (b) the global economy?
- In what ways is the UK’s economic growth unbalanced?
- How much credence should be given to economic forecasts?
- Should countries’ economic performance be judged primarily by their growth in GDP?
The eurozone recorded 0.0% growth in the second quarter of 2014. While the UK and USA are now experiencing relatively buoyant economic growth, the eurozone as a whole is stagnating. Some of the 18 eurozone countries, it is true, are now growing, including Spain, Portugal, Ireland and the Netherlands. But the German and Italian economies contracted in the three months to the end of June, while France experienced zero growth.
