Wednesday, April 27, 2011

I have occasionally on this blog referred to a neural network forecasting model of the UK economy that I like to use. I most recently reported on forecasts from this model in January of this year. At that time, the model was predicting a fall-off in growth towards the end of summer of this year. The most recent experiments that I have run with this model use data up to February 2011, and they still indicate that growth will falter towards the end of summer.

The caveats surrounding this model are many: it's based on industrial production data (since this is available monthly), and doesn't include information about other variables - notably policy. But for a simple model it has a rather good track record. While the pessimism in the model's forecasts may not be widely shared, these figures do serve to emphasise just how fragile is the recovery.

The graph below shows the actual data back to just before the downturn - the forecasts are at the right of the graph (where the line turns red) and look forward 18 months.

The growth figures announced today indicate that the UK's economy grew by 0.5% over the first 3 months of this year. In the last 3 months of last year, it fell by 0.5%. So we are not yet quite back to where we were in the third quarter of 2010. (A fall of 5% followed by a rise of 5% nets out as a fall of 0.25%, not zero, because the second 5% is calculated from a lower base.) The contraction in the last quarter of 2010 was, we were told, due to poor weather. If that were really the case (and the evidence suggests that, in part at least, it was), then the improvement in the first quarter of this year is surely due to the absence of poor weather - and nothing more fundamental than that. As the Chancellor of the Exchequer said yesterday, 'we are not out of the woods yet'; the recovery, such as it is, remains very fragile.

That said, from this low base, there are now some signs that offer encouragement. It remains essential for the government, in its zeal to attack the budget deficit, to pay heed to the impact that its policies has on growth.

Thursday, April 21, 2011

Are we seeing some signs of life? Consumer confidence up,retail sales up, unemployment down...

One would hope so. But the improvement in these statistics is slight, and in each case the data follow on from very bad figures in the previous month. If indeed we are seeing the first indications of recovery, that recovery remains very fragile. Whatever one's views might be about the speed with which the budget deficit is being cut, the policy shock that still has to be played out is likely to result in a bumpy ride over the coming months.

Wednesday, April 06, 2011

Many observers have noted that the financial situation facing the UK is different from that in Greece, Ireland, or Portugal. The rates of interest which the latter countries have had to offer in order to sell their Treasury bills illustrate this. While six month T bills can be sold by the UK at an interest rate of around 0.7%, Portugal has today auctioned off six month T bills at a mammoth 5.1%. This figure makes the terms of any prospective bail-out attractive to the Portuguese authorities, and such a bail-out is now surely inevitable.