UK Economy Grows By 0.6 % Despite Brexit Shock
Some economists might fear imminent trouble, but the health of the British economy appears to be in decent shape. The London stock market has hit a new 11-month high today. The FTSE 100 has risen by 20 points to 6744, the highest level since August 2015.
The Figures: It’s an April thing and nothing else
The talk of the day is UK’s economy as the official GDP figures for the second quarter of this year have just been released this morning. The report covers the period up to the 23rd of June when the referendum took place. So the Brexit fluctuations of last month will not be disturbing today’s data; not yet at least, since we’ll have to wait until August for that.
The UK economy has expanded by 0.6% the last three months since January-March’s 0.4%. In the last twelve months the UK economy grew by 2.2%; it was 2.0% three months ago. In the second quarter, growth was essentially noticeable in April, while in May and June it diminished.
The new Chancellor of the Exchequer, Philip Hammond, was very pleased with today’s GDP figures, praising the strength of the economy as an indicator for a muscular Brexit: “Indeed we saw the strongest quarterly rise in production for nearly twenty years, so it is clear we enter our negotiations to leave the EU from a position of economic strength. Those negotiations will signal the beginning of a period of adjustment, but I am confident we have the tools to manage the challenges ahead, and along with the Bank of England, this government will take whatever action is necessary to support our economy and maintain business and consumer confidence.”
UK industrial output increased by 2.1% in the period from April to June. The service sector slowed to 0.5% growth and construction shrank by 0.4%.
According to the Office for National Statistics’ economist, Joe Grice, UK’s carmakers and pharmaceutical companies were the driving economic forces for UK’s growth.
However, a TUC report released on Wednesday showed that between 2007 and 2015 real wages in the UK suffered a massive fall, as income from work adjusted for inflation fell by 10.4%. In a list of 29 countries in the Organisation for Economic Cooperation and Development, the fall is equaled only by Greece. The UK, Greece and Portugal were the only OECD countries that saw real wages plummet.
What is Gross Domestic Product (GDP)?
GDP is the market value of all final goods and services produced in a country within a specific period of time. “You can’t compare apples and oranges” people often say, but yes, the GDP does exactly this. It places different products into a single measure of the value of economic activity. The market price of an item is the amount people will pay for, and thus its value. If, for example, the price of an apple is double of that of an orange, then an apple contributes twice as much to GDP as does an orange.
GDP measures all items, from haircuts, books and movies to apples and housing services. But there are also items that cannot be measured: items produced and sold illegally, or homemade and homegrown food. As long as products are not sold in the market, then they are not accountable and are never part of GDP.
Criticism of GDP
GDP is an intellectual measure of the size of the economy. But, as the amount of money that circulates from one hand to another, does not make any distinction between benefits and costs (credits and debits), productive and destructive activities, sustainable or non-sustainable activities. The GDP treats everything that occurs within the marketplace as a positive gain for human beings, dismissing things that cannot be converted into money as unimportant to social welfare. As mentioned, in the UK real wages have shrunk by 10% since the 2007 financial crisis—this is only matched by Greece—Frances O’ Grady of the Trades Union Congress, said.
As an indicator of economic growth, the GDP creates a false sense of prosperity and security because it ignores costs by considering only the benefits. For example, annual growth that exceeds 3% is usually understood as favourable, despite the dangers that this calculation might conceal by not taking into account costs and human labour.
Economists: What they Say
Pantheon Macroeconomics economist, Samuel Tombs, said: “The economy had done quite well in the run-up to the referendum, but that can turn pretty quickly. We’ve already seen consumer confidence fall very sharply and all of the survey data has just collapsed over the last month.”
Jeremy Cook, chief economist at the international payments company, World First, expressed similar fears about Britain’s economy shrinking: “Preliminary GDP figures are always heavily caveated; less than 50% of the survey data is in and will likely over-represent the beginning of the quarter compared to the end.....Unfortunately we believe the overall UK economic picture is one of recession at the moment.”
Economist at the Intelligence Unit, Danielle Haralambous, also believes that UK economy’s strong performance will not last. While manufacturing production in the second quarter was a determining factor for the 0.6% GDP growth, this will not be sustained in the third quarter.
Many economists argue that the strong performance in April was a defining factor for GDP growth, and this was not the case in June when the economy was weakening. Martin Beck, senior economic advisor to the EY ITEM Club, noted that GDP growth in the second quarter might be “the last hurrah for the economy before it enters a softer and more turbulent period. The lack of momentum as the economy entered Q3 means that the chances of a negative reading for the current quarter are relatively high.”
Matthew Whittaker of the Resolution Foundation stressed that the economy was only 1.3% bigger than in 2008, much worse than previous recessions, when you consider the increase in population.
While predictions that the economy would come to a standstill before the Brexit referendum might appear retrospectively false, fears about Britain entering recession remain strong and valid. Many economists point out that the EU referendum’s shockwaves have not receded and will continue to reverberate in the business world, felt in the slowing of growth in the coming year.
Gloomy days Ahead
Philip Hammond might be the perfect jester trying to convince us that all is well, but The Guardian’s economic editor, Larry Elliott, says that Hammond knows very well that Britain’s economy is entering turbulent times and the Bank of England is fully aware of that too.
The Bank of England had warned before the Brexit vote about a possible recession evident in two successive quarters of negative growth. It had also referred to a package of measures to boost confidence in businesses and households which will be announcing next week. In the coming week the bank’s monetary policy committee will be cutting interest rates from 0.5% to 0.25%.