The rate of growth in India has fallen to its lowest level since the first three months of 2009 – the period when many countries were plunging into recession. Although the annual rate was still 4.4% in Q2 2013 (a rate most Western governments would love to achieve!), it had averaged 8.2% from 2003 to 2007 and 9.5% from 2010 to 2011 (see).
And the rupee has been falling in value (see chart below). The exchange rate of the rupee to the dollar has depreciated by 21% since the start of the year and by 14% since the beginning of August (click here for a PowerPoint of the chart). This has pushed up the price of imports and raised fears that inflation, already approaching 10%, will rise.
There have also been concerns about the health of India’s banking sector, with worries over the possible rise in bad loans.
One result of all these factors is that the confidence of investors has been shaken. Bond prices have fallen and so too have share prices. The Mumbai Sensex index fell by 11.5% from 22 July to 27 August. Worried about possible capital flight, the Indian government imposed capital controls on Indian residents on 14 August. It has, however, since ruled out limiting the outflow of funds by foreign investors.
The following articles and videos look at the causes of the current economic problems and what can be done about them.
Webcasts
India’s sliding economy Aljazeera (24/8/13)
Economic woes grow for Indians as rupee continues to slide BBC News, Sanjoy Majumder (30/8/13)
What is behind the Indian economy’s fall from grace? BBC News, Yogita Limaye (30/8/13)
Indian rupee: How onions reflect health of economy BBC News, Nitin Srivastava (30/8/13)
The rise and fall of India’s economy NDTV (20/8/13)
Is the Indian economy heading for a doom? NDTV, Dr Arvind Virmani, Adi Godrej, P N Vijay, Sanjay Nirupam and Prakash Javadekar (20/7/13)
Can Rajan stabilise India’s economy? FT Video, Stuart Kirk and Julia Grindell (7/8/13)
Articles
India in trouble: The reckoning The Economist (24/8/13)
PM warns of short term shocks, attacks BJP for stalling Parliament The Economic Times of India (31/8/13)
External global factors led to rupee slide: Manmohan in Lok Sabha Hindustan Times (30/8/13)
India seeks allies to defend rupee as growth skids to four-year low Reuters, Manoj Kumar and Frank Jack Daniel (30/8/13)
Rupee charts in uncharted territory Reuters, Saikat Chatterjee and Subhadip Sircar (30/8/13)
Indian Prime Minister Says Rupee Crisis Will Only Make Country Stronger Time World, ilanjana Bhowmick (30/8/13)
Is India in danger of another crisis? BBC News, Linda Yueh (8/8/13)
India’s GDP shows continuing slowdown BBC News (30/8/13)
Slowest India Growth Since 2009 Pressures Singh to Support Rupee Bloomberg, Unni Krishnan (30/8/13)
Questions
- Why has the rupee fallen in value so dramatically? Is there likely to have been overshooting?
- What are the economic consequences of this large-scale depreciation? Who gain and who lose?
- What factors are likely to affect the rate of growth in India over the coming months?
- Why is the Indian economy more vulnerable than many other Asian economies?
- What economic policies are being pursued by the Indian government? How successful are they likely to be?
The Preliminary Estimate of the UK Q2 GDP figures by the Office for National Statistics show that the UK economy grew by 0.6% in the second quarter of 2013: double the growth rate of the first quarter and almost back to the long-run average growth rate prior to 2008.
At first sight, this would seem to be good news – certainly from the government’s point of view. What is more, unlike the previous quarter, growth is spread relatively evenly across the three main sectors: the production (manufacturing, mining, water supply, etc.) and services sectors both grew by 0.6% and the construction sector by 0.9% (this sector fell by 1.8% in the previous quarter). (Click here for a PowerPoint of the chart below.)
But while growth in the latest quarter may be balanced between the broad sectors, the rise in aggregate demand is not balanced between its components. As an earlier news item (A balancing act) showed, the rise in aggregate demand has been driven largely by a rise in consumption, and a corresponding fall in saving. Exports are rising only slowly and investment is some 25% lower than in the boom years prior to 2008.
So will the latest growth be sustainable? Will investment now begin to pick up and what constraints are there on investment? The following articles consider some of the issues.
Articles
Economy firing on all cylinders as growth hits 0.6pc The Telegraph, Philip Aldrick (25/7/13)
The good, the bad or the ugly? How the UK economy stands up. The Telegraph, Philip Aldrick (25/7/13)
George Osborne’s 0.6% growth is good but unspectacular The Guardian, Larry Elliott (25/7/13)
The (not-so) green shoots of recovery The Economist, John Van Reenen (23/7/13)
Economic recovery slow to take root for some in UK Reuters, William Schomberg and Max De Haldevang (25/7/13)
GDP figures offer hard evidence for political narrative BBC News, Paul Mason (25/7/13)
Ignore the hype: Britain’s ‘recovery’ is a fantasy that hides our weakness The Observer, Will Hutton (21/7/13)
UK economy: Half-speed ahead BBC News, Stephanie Flanders (25/7/13)
BoE guidance can help sustain the UK recovery The Economist, Kevin Daly (22/7/13)
George Osborne’s description of the economy is near-Orwellian The Guardian, Ha-Joon Chang (26/7/13)
Economic growth: more must be done to encourage investment The Guardian, Phillip Inman (1/8/13)
Data
Gross Domestic Product: Preliminary Estimate, Q2 2013 ONS (25/7/13)
Questions
- Compare the macroeconomic situation today with that prior to the financial crisis of 2007/8 and subsequent recession.
- What factors will determine the sustainability of the UK economic recovery?
- What is meant by the ‘accelerator’ and what will determine the size of any accelerator effect from the latest rise in UK GDP?
- What supply-side constraints are likely to limit the rate and extent of recovery?
- Why do economies that are in recession ‘naturally bounce back’ without any government intervention? Have the macroeconomic policies of the UK government helped or hindered this bounce back? Explain.
- What monetary measures by the Bank of England are most appropriate in the current circumstances?
One very important characteristic of economic growth is its short-term volatility. Economic activity is notoriously volatile. It is such a fundamental idea that economists refer to it as one of their threshold concepts. The volatility of growth sees occasional recessions. The traditional definition is where real GDP (output) declines for 2 or more consecutive quarters. The latest figures from the Quarterly National Accounts call into question whether the UK technically experienced a recession at the start of 2012 with output broadly flat in 2012 Q1 following a contraction of 0.1 per cent in 2011 Q4.
The ONS’s latest output numbers raise some interesting questions around our understanding of what constitutes a recession. These figures show that the 2008/9 recession was deeper than first thought with output declining by 7.2 per cent. They show that UK output peaked in 2008Q1 (£392.786 billion at 2010 prices). There then followed 6 quarters where output declined.
Output declined again in 2010 Q4 (–0.2% growth) and again in 2011 Q4 (–0.1% growth). But then interpretations of the data become more controversial. Not least, we get in the debates concerning the accuracy with which we can expect to measure the size of the economy and so to how many decimal places one should realistically measure a rise or fall. In terms of the raw real GDP numbers output fell in 2012 Q1. In 2011 Q4 GDP is estimated at £376,462 billion (at 2010 prices) ‘falling’ to £376,436 billion (at 2010 prices) in 2012 Q1. But, this is a percentage fall only when measured to the third decimal place (–0.007% growth).
In its publication Impact of changes in the National Accounts and economic commentary for Q1 2013 the ONS argue that:
While some commentators may attempt to read some significance into this revision, particularly in the context of whether the UK experienced a “double-dip” recession, it is clearly absurd to imagine that it is possible to measure the size of the economy to this degree of accuracy. The best interpretation of the Blue Book figures is that the economy was flat in the first quarter of 2012, and 0.6% larger than in the same quarter of 2011.
It is however understandable that those with vested interests – including economists, policy-makers and politicians – will take a slightly different view and will read more into the figures than perhaps an objective, sober view might demand. What appears more certain is that output did again fall in 2012 Q2 (–0.5 per cent growth) and in 2012 Q4 (–0.2 per cent growth). Despite estimated growth of 0.3 per cent in 2013 Q1, output remains 3.9 per cent lower than at its 2008 Q1 peak.
Perhaps the ‘absurdity’ or not around the debate of a double-dip recessions strengthens the argument for a more holistic and considered view of what constitutes a recession. In the USA the wonderfully-named Business Cycle Dating Committee takes a less fixed view of economic activity and, hence, of recessions. Its website argues:
It (the Committee) examines and compares the behavior of various measures of broad activity: real GDP measured on the product and income sides, economy-wide employment, and real income. The Committee also may consider indicators that do not cover the entire economy, such as real sales and the Federal Reserve’s index of industrial production (IP).
Of course, the advantage of focusing on real GDP alone in measuring activity and in determining recessions is that it is usually very straightforward to interpret. Regardless of whether the UK has experienced or not two recessions in close proximity, our chart helps to put the recent growth numbers into an historical context
. It shows both the quarter-to-quarter changes in real GDP (left-hand axis) and the level of output as measured by GDP at constant 2010 prices (right-hand axis). Click here to download the chart to PowerPoint.
The chart captures nicely the twin characteristics of growth. Since 1960, the average rate of growth per quarter has been 0.63 per cent. This is equivalent to an average rate of growth of 2.55 per cent per year. Since 2008 Q2, quarterly growth has averaged –0.19 per cent which is equivalent to an annual rate of growth of –0.78 per cent! In any language these are extraordinary numbers. Indeed, one could argue that focusing any policy debate around whether or not the UK experienced a double-dip recession rather misses the more general point concerning the absense of any sustained economic growth since 2008.
Data
Quarterly National Accounts Time Series Dataset Q1 2013 Office for National StatisticsStatistical Bulletin: Quarterly National Accounts Q1 2013 Office for National Statistics
Articles
UK avoided double-dip recession in 2011, revised official data shows Guardian, Phillip Inman (27/6/13)
Britain’s double dip recession revised away, but picture still grim Reuters, David Milliken and William Schomberg (27/6/13)
UK double-dip recession revised away BBC News (27/6/13)
IMF raises UK economic growth forecast BBC News (9/7/13)
IMF raises UK economic growth forecast to 0.9% but cuts prediction for global growth Independent, Holly Williams (9/7/13)
IMF Upgrades UK Growth Forecast For 2013 Sky News (9/7/13)
Questions
- What is the difference between nominal and real GDP? Which of these helps to track changes in economic output?
- Looking at the chart above, summarise the key patterns in real GDP since the 1960s.
- What is a recession? What is a double-dip recession?
- What are some of the problems with the traditional definition of a recession?
- Explain the arguments for and against the proposition that the UK has recently experienced a double-dip recession.
- Can a recession occur if nominal GDP is actually rising? Explain your answer.
- What factors might result in economic growth being so variable?
- Produce a short briefing paper exploring the prospects for economic growth in the UK over the next 12 to 18 months.
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)
Questions
- Why do we typically focus on real GDP rather than nominal GDP when analysing economic growth?
- What is meant by aggregate demand? Of what importance is consumer spending to aggregate demand?
- Why might the patterns we observe in consumer spending differ from those in other components of aggregate demand?
- What factors might influence the determination of consumer spending?
- What do you understand by gross fixed capital formation? What factors might help to explain how its level is determined?
- Of what significance is gross fixed capital formation for aggregate demand and for aggregate supply?
- What is a recession? What is a double-dip recession?
- What data would you need to collect to identify a recession?
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)
Questions
- Why are numerous estimates of GDP made by the ONS?
- How is GDP measured? Is it an accurate measure of economic growth? What about economic development?
- Why does 0.3% growth in the first quarter of GDP not necessarily imply that the UK economy is recovering?
- Why have certain aspects of the UK economy performed better or worse than others?
- What areas should the government invest in, according to the IMF?
- Why would government spending in investment create economic growth? Is this likely to be short term or long term?
The rate of growth in India has fallen to its lowest level since the first three months of 2009 – the period when many countries were plunging into recession. Although the annual rate was still 4.4% in Q2 2013 (a rate most Western governments would love to achieve!), it had averaged 8.2% from 2003 to 2007 and 9.5% from 2010 to 2011 (see).
