Author: Pilgrim

I have been trying to get a better understanding of all the economic factors for well over a year now and it's still very difficult to get hold of information that I can understand. I have regularly quoted from the 2009 Budget document and have printed tables from it on my desk (very sad!). We keep hearing comparisons with both the great depression of the 1930s and Japan's lost decade (which is now nearer to 2 decades).

The situation with the banks is the key, I think. They have lost a lot of money but I think there will be more money still to be written off than they have done so far. In other words they are less than half way through the losses. It may take much more time for the future losses to be realised than the sharp decline of 2008, maybe 3 years? Until the losses subside the banks will not take on any risky lending so economic growth will be stifled for years.

In terms of GDP, finding real numbers is nearly impossible. Consider the following from the BBC's in depth recession section:

"First of all, what do we mean by economic growth?

It is the annual rate of increase in real GDP, where GDP stands for "gross domestic product". This is the country's production of goods and services, valued at market prices (or at cost when the goods are not sold). The figures are then corrected for inflation [how about deflation? Pilgrim] by using the prices that existed in some chosen base year. Currently, GDP statistics in the UK use 2003 as the base year.

In 2006, GDP was £1,229bn in 2003 prices; in 2007 it was £1,266bn. This means that real output grew by £37bn or 3.0% in 2007.

In 2008 growth is likely to be under 1% and negative for the last quarter. Next year it will probably be negative."

It is still up on their site but was written in October 2008. It does however contain the £1,266bn figure for 2007 which corresponds to the 2009 Budget document. The predictions at that time were:

2007 £1266.3

2008 £1275.3

2009 £1228.8 to £1232.5

2010 £1241.4 to £1251.2

2011 £1281.7 to £1298.1

But the predictions were hopelessly wrong. For 2008, the BBC quote above was 'growth is likely to be under 1%'. And the budget still thought 2008 would see growth of £9bn or 0.7%. The latest available official document from the ONS gives the following quarter on quarter, seasonally adjusted, GDP percentage changes (and apparently with 2005 as the base year):

2007 Q2 +0.6

2007 Q3 +0.5

2007 Q4 +0.5

2008 Q1 +0.8

2008 Q2 -0.1

2008 Q3 -0.7

2008 Q4 -1.8

2009 Q1 -2.4

2009 Q2 -0.8

Now I know the maths is wrong but if we simply add the four quarters of 2008 we get -1.8% (and so far in 2009 we have -3.2%) and £1266.3bn -1.8% would be £1243.5bn, some £31.8bn below the budget prediction. How 2009 will eventually turn out remains to be seen.

What is clear is that the real GDP numbers whilst interesting and an anchor to understanding the subject are rarely reported. What is reported is the percentage change quarter on quarter figures, and -2.4% in 2009 Q1 will take some working off.

Anyway, here's a question. If total net debt is £800bn (a tangible 2009 value), how much is that as a percentage of GDP when the numbers are stated against a base year (which moves)?

It's like nailing a jelly to the wall.

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