By John Charles Dyer, UK Correspondent
25 April 2013. It’s official. The Office for National Statistics (ONS) estimates the UK avoided the dreaded Triple Dip Recession -- at least for the first quarter of 2013. Based on 44% of the “required output determination” ONS estimates the UK grew 0.3% the first Quarter of 2013 over the last Quarter of 2012 and .4% over the first Quarter of 2012. The usual suspects celebrated the news as vindication of the Chancellor’s Plan A. But a cross section of economists and independent think tanks remain skeptical.
The skeptics include me. In this piece I will suggest a perspective I think more consistent with observable reality. The theme is, absolute numbers grow, but their value diminishes.
Consider Exchange Rate
I regularly convert US dollars into UK pounds. I’ve become very aware of the impact of fluctuating rates on the value of the converted currency.
In a prior FOI request I asked ONS how they account for these fluctuating rates in their estimates. ONS informed me they don’t, but they do adjust for inflation. I've asked ONS to confirm that is the case with the last figures.
From the perspective of one who makes and spends his or her money in the UK the impact of exchange may appear less important than inflation or subsumed in its calculation. But when one must consider what it will cost in outside currency (an asset) to buy pounds (a commodity), it's an important consideration and an indicator of the strength of the UK economy. Moreover, in the end, I as a consumer must still buy at inflating prices -- and pay taxes -- with pounds of fluctuating value.
So I regularly ask, what will it cost in US dollars to buy £4,000 for the month’s living expenses. I also regularly ask the trends and whether the timing’s best to take care of a US obligation rather than convert dollars into pounds to spend in the UK. That is in its small way just what transnational investors and businesses do when they make investment decisions.
Based on this experience I decided to look at the ONS headline figures through the prism of the exchange rates. I asked, what did it cost in US dollars to buy £4,000 per month in each of the quarters ONS compared.
The detailed work sheet can be found here Download Exchange Rate Worksheet .
Briefly, it cost me $650 more to buy £12,000 pounds during the last Quarter of 2012 than it did during the first Quarter 2013 and $241 more during the first Quarter of 2012 than the first Quarter of 2013. Restated another way, the £12,000 for first Quarter 2013 was of lesser dollar value than either of the comparison Quarters. The drop in value was 3.4% and 1.3% respectively. While the absolute numbers grew .3% and .4% respectively their value relative to the dollar shrank.
Does that put the .3% and .4% GDP growth figures into a different perspective?
Where else have we seen an increase in absolute numbers but a contraction in their value? Employment. Between 2008 and 2012 the net number of persons estimated employed at least one hour per week for pay increased 402,000, but the percentage of working age adults actually working for pay shrank from 59.6% in 2008 to 58.7% at the end of 2012. Moreover the majority of new employment was part time, for which the average wage was £155 per week.
The light shed using this model appears even more dramatic when comparing the first Quarter of 2008 -- identified by ONS as the pre crash peak -- to the second Quarter of 2009 -- identified by ONS as the post crash trough -- to the first Quarter of 2013. The value of £4,000 fell 22% from the peak. Startling, but perhaps more startling is realization the value of £4,000 also fell 6% from the Quarter ONS identifies as the recession's trough.
I recognize and acknowledge the economic picture is also more complicated than my simple comparisons based on the value represented by how much in dollars it costs for a person to transfer funds from the US to the UK. But the model does have a value and a point. It suggests an explanation more in keeping with our daily experience, one based on an integrative look at the indicators rather than taking each one separately as if isolated from one another. Together they suggest 1) the value of GDP declined while absolute numbers increased and 2) the UK economy has never really climbed back out of the trough.
The picture thus presented matches up not only with underlying employment numbers and trends, but also observation. We all know our incomes buy less. We all know most of us -- if we can find work -- work longer sometimes at more jobs just to keep the bottom from falling out from under our personal economies. We all can see what’s happening across our High Streets. We see retail shops closing, replaced by Pay Day loan companies, betting establishments and Charity shops. We see food bank usage rising. We know the distribution of aggregate GDP has changed, increasingly redistributed from the many to the few. We aren’t blind are we.
Placing GDP figures in line with exchange rate valuations and detailed employment data yields a consistent picture -- also consistent with our personal experience. The rosy headlines don't.
Moreover, they don’t for investors considering whether or not to invest dollars in the UK. Such decisions are complicated. Sometimes an investment in a “distressed” company (or country) can be a money maker. But the UK policy maker surely has to wonder whether that sort of investor builds the future or strips the distressed assets then turns them over. Is that the kind of investment the UK wants or needs?
Responsiblity is the ability to respond
Nothing of significance changed between last week and this.
Last week IMF advised in the clearest of terms the current economic policy fails the UK. It should be changed.
That policy still fails the UK this week. It still needs adjustment. The ONS figures do not suggest the UK economy heals. As factoring in the long term exchange rate trends demonstrate, the UK remains mired in a deep economic trough.
That will not change without a change in economic strategy, but the Chancellor and Prime Minister reject all advice to change. They grasp at the straws of transient estimates to justify themselves. They are wrong. Economics is a mechanic's tool box. What mechanic refuses for ideological reasons to use a Torque Wrench for a Torque Wrench's task but rather insists on using a hammer? That is what the Chancellor and Prime Minister do.
They fail the country with their obstinance. It's past time to change strategies or change strategists.