UK Stealth Economic Boom, GDP 1.1% Growth Catches Press and Academic Economists By Surprise
Economics / UK Economy Jul 23, 2010 - 08:51 AM GMTBy: Nadeem_Walayat
The UK registered strong GDP growth during the second quarter of 2010 of 1.1%, annualised to 4.4%, which caught the mainstream press, academic economists and even the City by surprise who had typically penciled in growth expectations of between 0.3% and 0.5% from just the day before let alone longer term actionable forecasts, much of the recent mainstream press commentary has been focused on the risks of a double dip recession as illustrated below:
Bloomberg - Blanchflower Says Budget `Certain' to Lead to Double Dip
Former Bank of England policy maker David Blanchflower said the spending cuts the government plans in its emergency budget tomorrow “look certain” to push the U.K. back into a recession.
“You can’t just decimate the public sector and assume the private sector will step into the hole,” Blanchflower said in an interview on Bloomberg Television’s “Countdown” in London today. “The danger now is we’re certainly going into a double- dip recession. I think that’s absolutely certain given what’s coming.”
Financial Times, Martin Wolf is worried that the concerted austerity of Germany, Britain and other industrialised countries may "destroy the recovery".
Guardian - Britain's leading companies increasingly fear the UK could suffer a double dip recession because of government public spending cuts and a renewed economic slowdown across the globe, according to a report released today.
Telegraph - A survey of chief financial officers (CFOs) by Deloitte found that a balance of just 24pc were feeling more optimistic in the second quarter, compared with 40pc in the first quarter.
It was the lowest level in 12 months, as the average CFO attached a 38pc probability to the chance of a double-dip, up from 33pc previously.
The so called experts who never saw the strong economic recovery coming reacted by dismissing the figures as unsustainable in the face of government austerity measures to combat the UK's budget deficit.
UK Economic Growth Forecast 2010 to 2011
The UK economic GDP growth for 2010 Q2 came in at 1.1% compared against my forecast of December 2009 Q2 growth of 1.3% (31 Dec 2009 - UK Economy GDP Growth Forecast 2010 and 2011, The Stealth Election Boom ), which is against expectations of yesterday from the academic economists that populate the mainstream press of between 0.3% and 0.5%.
The growth trend is inline with my forecast expectations that projected a strong economic recovery starting in Q4 2009 and for the whole of 2010 continuing into 2011 as illustrated by the graph below.
Growth for the first half of 2010 now stands at 1.5%, which compares favourably against my expectations for 2010 growth of 2.8% and blasts a hole in the forecasts of academic economics institutions as the below table from the Inflation Mega-Trend Ebook illustrates (FREE DOWNLOAD) -
UK Economic Growth 2010
| Forecaster | Forecast |
| European Commission | +0.9% |
| International Monetary Fund | +0.9% |
| David Kern, British Chambers of Commerce | +1.1% |
| Organisation for Economic Co-operation and Development (OECD) | +1.2% |
| Alistair Darling, Treasury | +1% to +1.5% |
| Bank of England | +2.1% |
However the ConLib government has effectively pressed the reset button on the UK by announcing the most radical budget of the past 30 years that seeks to withdraw £113 billion annually out of the economy by 2015-16 which will undoubtedly impact on economic growth for many years and therefore demands in depth analysis to evaluate the prospects for growth once the austerity measures start to be implemented from October 2010. To receive this in depth analysis and forecast in your email in box ensure you are subscribed to my always free newsletter.
Bank of England Ignoring UK Inflation
UK Inflation of CPI at 3.2% for June 2010 is exactly in line with my trend forecast for 2010 as of December 2009 that projected June inflation data of 3.2%. My analysis since November has been warning of a spike in UK inflation as part of an anticipated inflation mega-trend (18 Nov 2009 - Deflationists Are WRONG, Prepare for the INFLATION Mega-Trend ) that culminated in the forecast of 27th December 2009 (UK CPI Inflation Forecast 2010, Imminent and Sustained Spike Above 3%) and the Inflation Mega-trend Ebook of January 2010 (FREE DOWNLOAD) as illustrated by the below graph.
The governments response to high inflation has been to CHANGE the recognised measure of inflation from RPI to CPI indexing so as to use a sleight of hand to effectively tax the country by an extra 1 to 2% per annum so as to depress benefit payments, spending and wage increases which are predominantly increased in line with RPI inflation i.e. 5% instead of 3.2%, this is also in advance of the VAT hike which is expected to send RPI above 6%.
Another sign of this stealth theft was the NS&I pulling the plug on Index Linked Certificates which were one of the few defences against the governments inflation stealth tax. The certificates paid RPI +1% resulting in an current tax free return of 6% per annum which is typically double the rate offered by the the bailed out banks. It is highly likely that when the certificates return they will linked to CPI which tends to be between 1% and 2% below the RPI measure and therefore makes a huge difference over the long-run.
UK Interest Rates
The theft from savers continues with UK base interest rates held at 0.5% despite real UK inflation of 5%, resulting in pittance savings rates of less than 2% for most savers and even the best accounts are barely able to reach 2.5%.
Existing Forecast : UK Interest Rates Forecast 2010-11: UK interest Rates to Start Rising From Mid 2010 and Continue into end of 2010 to Target 1.75% / 2%, Continue Higher into Mid 2011 to Target 3%. (UK Interest Rate Forecast 2010 and 2011 )
My UK interest rate forecast will need to be revised following the new governments emergency reset budget which will follow on from the in depth analysis of the UK economy over the next few days (subscribe to my always free newsletter).
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By Nadeem Walayat
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Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis specialises on UK inflation, economy, interest rates and the housing market and he is the author of the NEW Inflation Mega-Trend ebook that can be downloaded for Free. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 500 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk
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