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The Coalition thinks that 29% of the population must be right.
[I thank Alex Izurieta for his sensible advice on my note of 9 May. Statistics in this note are from http://www.statistics.gov.uk/cci/nugget.asp?id=192]
At the beginning of May I forecast that the upcoming statistics would show that the UK economy declined in the first quarter of 2011, as it did in the last quarter of 2010. Somewhat recklessly I suggested a specific number, minus 0.7 percent. To my considerable surprise, official statistics allege an increase of 0.5 percent. When this putative increase was announced, I noted on my web page that once more detailed statistics were released, I would confront my mistake.
I was wise to wait, only because I though that the Coalition would be even "further and deeper" that they were in practice. First, I challenged the sanguine view of Cambridge Economics that private investment would increase by three percent in 2011. My suggestion that investment would be negative was correct. It fell by 4.4 percent. Second, I predicted that while exports would be positive, their growth would not be sufficient to overcome the fall in investment. In the event, export volume rose by 3.4 percent (I was too optimistic with a forecast of five percent). When the changes in exports and investment are weighted by their shares in GDP, the net effect is not significantly different from zero, as I anticipated.
If the net effect of private investment and exports was zero, how is a positive growth rate explained, small though it was? The answer is simple. Because household consumption is derivative from household income, the components of aggregate demand reduce to three: exports, investment and government expenditure. If the first two add to zero, the weak expansionary pressure must have come from the public sector. It did, by one percent. I got that wrong, because I believed, as promised by the chancellor, that the cuts would begin at once.
Because public expenditure is about forty percent of GDP, a one percent increase converts to a growth impetus of 0.4 percent. This leaves 0.1 percentage points of growth to explain, which resulted from a combination of increased inventories and measurement error. Finally, I asserted that real household income had fallen during the quarter, which it did. In current prices it rose by 1.3 percent in current prices, compared to the increase in the GDP deflator of 2.8 percent. The decline in real income resulted in a fall in household consumption measured as 0.6 percent.
What happened during the first quarter is obvious to all but the ideologically blinkered: 1) in anticipation of the public sector spending cuts promised by the Coalition government, businesses reduced investment; 2) facing weak global demand, export growth declined; 3) private production and income declined, reducing household expenditure; and 4) aggregate decline was prevented by an increase in public expenditure during the quarter. With the last certain to go negative during the rest of the year, bet on negative growth for 2011. Far from supporting a Neo-lithic policy of cuts, the positive growth rate for the first quarter is an economic slap in the face to the Coalition. The basis for George Osborne's "recovery" was the public section, which saved him from the embarrassment of decline.
I wish that I could stake a claim on the Nobel Prize for my forecasts, but only fools and knaves (and there are many, some of whom have won Nobel Prizes) would have expected otherwise. The Coalition has a purpose, to use the fiscal deficit as an excuse to destroy the welfare state. The assertions that reducing pubic expenditure will induce private expenditure to compensate is nothing more than cynical cover for that venal purpose.
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