The Quarterly National Accounts from the Office for National Statistics (ONS) reveal that the output of the UK economy grew by 0.4% in the fourth quarter of 2009. This is another upward revision to the growth number for Q4; the first estimate put growth at 0.1% and the second estimate at 0.3%.
The ONS release also reported the value of the UK economy’s output in calendar year 2009. In the release, GDP in 2009 is estimated at £1.396 trillion. Now, this is what economists call the nominal estimate because it measures the economy’s output using the prevailing prices, e.g. in the case of output in 2009, the prices of 2009. Of course, the problem arises when we compare nominal GDP – or GDP at current prices – over time. If prices are changing how can we know whether the volume of output is actually rising or falling? Therefore, constant-price or real estimates are reported which aim to show what GDP would have been if prices had remained at their levels in some chosen year (the base year). The base year currently used in the UK is 2005.
If we look at nominal GDP estimates for the UK from 1948 up to 2008 we find that they rise each year. So, regardless of the fact that in some of these years output volumes fell, price rises (inflation) have been sufficient to cause nominal or current-price GDP to rise. But, this was not true in 2009!
But, why did nominal GDP fall in 2009? Well, firstly, the average price of the economy’s output, which is measured by the GDP deflator, rose by only 1.36% in 2009. This was the lowest rate of economy-wide inflation since 1999 (although real GDP or output rose by 3.9% in 1999). And, secondly, in 2009 output fell by 4.9%. The extent of the fall in output meant that price increases were not sufficient for nominal GDP to rise. In fact, the actual value of GDP in 2008 was £1.448 trillion as compared with £1.396 trillion in 2009. This means that nominal GDP fell by 3.6% in 2009. The next lowest recorded change, since comparable figures began in 1948, was actually in 2008 when nominal GDP rose by 3.5% (real GDP rose too in 2009, albeit by only 0.5%).
So, in short, the decline in both nominal and real GDP in 2009 indicates just how deep the economic downturn has been.
Articles
Britain’s economic growth revised up to 0.4% The Times, Gary Parkinson and Grainne Gilmore (30/3/10)
UK pulls out of recession faster than thought Reuters, Matt Falloon and Christina Fincher (30/3/10)
UK growth unexpectedly revised up to 0.4% BBC News (30/3/10) )
UK Q4 growth revised upward again to 0.4 pct Associated Press (AP), Jane Wardell (30/3/10)
Instant view – Q4 final GDP revised up to 0.4 per cent Reuters UK (30/3/10)
Data
Latest on GDP growth Office for National Statistics (30/3/10)
Quarterly National Accounts, Statistical Bulletin, March 2010 Office for National Statistics (30/3/10)
United Kingdom Economic Accounts, Time Series Data Office for National Statistics
For macroeconomic data for EU countries and other OECD countries, such as the USA, Canada, Japan, Australia and Korea, see:
AMECO online European Commission
Questions
- Explain what you understand by the terms ‘nominal GDP’ and ‘real GDP’. Can you think of other examples of where economists might distinguish between nominal and real variables?
- Explain under what circumstances nominal GDP could rise despite the output of the economy falling.
- The average annual change in nominal GDP since 1948 is 8.2% while that for real GDP is 2.4%. What do you think we can learn from each of these figures about long-term economic growth in the UK?
- What do you understand to be the difference between short-term and long-run economic growth? Where, in the commentary above, is there reference to short-term growth?
With an election approaching, there is much debate about recovery and cuts and about the relationships between the two. Will rapid cuts stimulate confidence in the UK by business and bankers and thereby stimulate investment and recovery, or will they drive the economy back into recession? The debate is not just between politicians vying for your vote; economists too are debating the issue. Many are taking to letter writing.
In the February 2010 news blog, A clash of ideas – what to do about the deficit, we considered three letters written by economists (linked to again below). There has now been a fourth – and doubtless not the last. This latest letter, in the wake of the Budget and the debates about the speed of the cuts, takes a Keynesian line and looks at the sustainability of the recovery – including social and environmental sustainability. It is signed by 34 people, mainly economists.
Letter: Better routes to economic recovery Guardian (27/3/10)
Letter: UK economy cries out for credible rescue plan Sunday Times, 20 economists (14/2/10)
Letter: First priority must be to restore robust growth Financial Times, Lord Skidelsky and others (18/2/10)
Letter: Sharp shock now would be dangerous Financial Times, Lord Layard and others (18/2/10)
Questions
- Summarise the arguments for making rapid cuts in the deficit.
- Summarise the arguments for making gradual cuts in the deficit in line with the recovery in private-sector demand.
- Under what conditions would the current high deficit crowd out private expenditure?
- What do you understand by a ‘Green New Deal’? How realistic is such a New Deal and would there be any downsides?
- Is the disagreement between the economists the result of (a) different analysis, (b) different objectives or (c) different interpretation of forecasts of the robustness of the recovery and how markets are likely to respond to alternative policies? Or is it a combination of two of them or all three? Explain your answer.
- Why is the effect of the recession on the supply-side of the economy crucial in determining the sustainability of a demand-led recovery?
A keenly awaited Budget, but what should we have expected? Chancellor Alistair Darling had warned that it wouldn’t be a ‘giveaway’ budget. The aim to cut the budget deficit in half over 4 years still remains and the UK economy is certainly not out of the woods yet.
You’ve probably seen the debate amongst politicians and economists over what should happen to government spending and it might be that the lower than expected net borrowing for 2009-2010 provides a much needed boost to the economy. With the election approaching, it seemed likely that some of this unexpected windfall would be spent. The following articles consider some key issues ahead of the 2010 Budget.
Budget 2010: Alistair Darling’s election budget BBC News, Stephanie Flanders (21/3/10)
Build-up to the Budget Deloitte, UK March 2010
Pre-Budget Report: What Alistair Darling has announced before Guardian, Katie Allen (9/12/09)
Budget 2010: Darling warns of ‘no giveaway’ BBC News (11/3/10)
FTSE climbs ahead of UK Budget Financial Times, Neil Dennis (24/3/10)
Bank bonus tax could net Treasury £2bn, E&Y says Telegraph, Angela Monaghan (24/3/10)
Alistair Darling set for stamp duty move BBC News (24/3/10)
Labour has run out of steam, says David Cameron Guardian, Haroon Siddique (24/3/10)
Ten things to look out for in the 2010 Budget Scotsman (24/3/10)
Sammy Wilson predicts ‘neutral budget’ BBC News, Ireland (24/3/10)
Do the right thing, Darling Guardian (24/3/10)
What do we want from the Budget? Daily Politics (23/3/10)
Budget boost for Labour as inflation falls to 3% TimesOnline (24/3/10)
Questions
- Why has the FTSE climbed ahead of the Budget?
- Why is there a possibility of a rise in stamp duty again? To what extent do you think it will be effective?
- Net borrowing for 2009/10 is expected to be lower than forecast. What should happen to this so-called ‘windfall’?
- What is expected from the Budget 2010? Once the Budget has taken place, think about the extent to which expectations were fulfilled.
- Why are excise duties on goods such as taxes and alcohol likely to be more effective than those on other goods?
Transport issues in the UK are always newsworthy topics, whether it is train delays, cancelled flights, the quality and frequency of service or damage to the environment. Here’s another one that’s been around for some time – high-speed rail-links. Countries such as France and Germany have had high-speed rail links for years, but the UK has lagged behind. Could this be about to change?
The proposal is for a £30bn 250mph high-speed rail link between London and Birmingham, with the possibility of a future extension to Northern England and Scotland. This idea has been on the cards for some years and there remains political disagreement about the routes, the funding and the environmental impact. Undoubtedly, such a rail-link would provide significant benefits: opening up job opportunities to more people; reducing the time taken to commute and hence reducing the opportunity cost of living further away from work. It could also affect house prices. Despite the economic advantages of such a development, there are also countless problems, not least to those who would be forced to leave their homes.
People in the surrounding areas would suffer from noise pollution and their views of the countryside would be changed to a view of a train line, with trains appearing several times an hour at peak times and travelling at about 250mph. Furthermore, those who will be the most adversely affected are unlikely to reap the benefits. Perhaps the residents of the Chilterns would be appeased if they were to benefit from a quicker journey to work, but the rail-link will not stop in their village. In fact, it’s unlikely that they would ever need to use it. There are significant external costs to both the residents in the affected areas and to the environment and these must be considered alongside the potential benefits to individuals, firms and the economy. Given the much needed cuts in public spending and the cost of such an investment, it will be interesting to see how this story develops over the next 10 years.
Podcasts and videos
£30bn high-speed rail plans unveiled Guardian, Jon Dennis (12/3/10)
Can we afford a ticket on new London-Birmingham rail line? Daily Politics (11/3/10)
All aboard? Parties disagree over high-speed rail route BBC Newsnight (11/3/10)
Articles
The opportunities and challenges of high speed rail BBC News, David Miller (11/3/10)
Beauty of Chilterns may be put at risk by fast rail link, say critics Guardian, Peter Walker (11/3/10)
High-speed rail is the right investment for Britain’s future Independent (12/3/10)
Hundreds of homes will go for new high-speed rail line Telegraph, David Milward (12/3/10)
Questions
- Make a list of the private costs and benefits of a high-speed rail link.
- Now, think about the external costs and benefits. Try using this to conduct a Cost-Benefit Analysis. Think about the likelihood of each cost/benefit arising and when it will arise. What discount factor will you use?
- There are likely to be various external costs to the residents of the Chilterns. Illustrate this concept on a diagram. Why does this represent a market failure?
- How would you propose compensating the residents of the Chilterns? Are there any problems with your proposal?
- Will such a rail link benefit everyone? How are the concepts of Pareto efficiency and opportunity cost relevant here?
- To what extent would this rail link solve the transport problems we face in the UK. Think about the impact on congestion.
In the Perils of snow and stamp duty blog here on the Sloman Economics News site we noted two particular influences that may have contributed to February’s reported fall in UK house prices: the end of the stamp duty holiday and the poor winter weather. Here we ponder a little more on the recent relationship between the economic and house prices cycles and, more generally, on the significance and causes of the recent imbalances between housing demand and supply.
What is particularly interesting about February’s house price fall (the Halifax put the fall at 1½% and the Nationwide at 1%) is that it is happening just after the economy reportedly grew by 0.3% in the last quarter of last year. But, then again, the house price fall is a reversal of an upward trend that started back in the summer of 2009 when the economy was still contracting! One’s gut reaction might be that cycles in house prices and economic growth ought to coincide. One reason for this is that the growth in income of the household sector will reflect the phase of the business cycle that the economy is in. For instance, during the slowdown or recessionary phase, like the period during 2008/9, the household sector’s income is likely to be shrinking and this will impact on housing demand. The magnitude of the effect on demand will depend on the sensitivity of housing demand to changing incomes – something that economists refer to as the income elasticity of demand.
We can, despite what might appear to be the recent puzzling behaviour of UK house prices, apply the concepts of demand and supply to gain some insight into what has been driving house prices. One way of thinking about the concepts of housing demand and supply is to relate them respectively to the number of ‘instructions to buy’ and the number of ‘instructions to sell’ on an estate agent’s book. We can then try and think of factors which might influence, in a given period, the number of instructions to buy and sell.
One possible explanation of the house price growth of last year is that despite the household sector’s shrinking income there were in fact a number of relatively cash-rich households out there, partly because the lowering of interest rates meant that the debt-servicing costs on variable rate mortgages fell. This left some households with more discretionary income to spend or to use to increase their housing investment by trading-up between one housing market and another. The key point here is if there is not a similar increase in the number of instructions to sell then the imbalance between the flow of instructions to buy and instructions to sell results in upward pressure in prices. In those markets where the imbalance between demand and supply is greatest price pressures are most acute. This appears to have been especially true last year in particular markets in the south of England.
So what of February’s fall? Well, again we have to think about the balance between instructions to buy and sell. What appears to have happened is that the demand pressures that built up in some markets lessened. And, as we consider elsewhere on this site, it is perhaps even the case that the wonderful British weather ‘played a hand’ by discouraging some households from looking to buy and adding to our estate agents’ lists of instructions to buy.
Articles
UK housing recovery running out of steam CITY A.M., Jessica Mead (5/3/10)
UK house prices ‘lose momentum’, say Nationwide BBC News (26/2/10)
UK house prices see first fall since June, says Halifax BBC News (4/3/10)
Fears grow of double dip for UK housing market The Independent, Sean O’Grady (5/3/10)
Data
Halifax House Price Data Lloyds Banking Group
House Prices: Data Download Nationwide Building Society
Questions
- What do economists mean by the income elasticity of demand? How income elastic do you think owner-occupied housing demand is likely to be?
- How important do you think current house prices are likely to be in affecting the number of instructions to buy and instructions to sell in the current period?
- How important do you think expectations of future house prices are in affecting the number of instructions to buy and sell in the current period?
- What role might financial institutions, like banks and building societies, play in affecting UK house price growth in 2010? How might their influence compare with that in the period 2008/9?
- Rather than economic growth affecting house prices, is it possible that house price growth could affect economic growth?