Is the recovery starting to falter?

Yesterday the Governor of the Bank of England Mark Carney asserted that Britain's economic recovery was "finally taking hold". And we, that is the Fraser of Allander Institute, said much the same thing for Scotland in our Economic Commentary published two weeks ago. However, we also warned that since the recovery was being principally driven by household spending fuelled by credit that this was likely to be unsustainable given the already high levels of household debt and falling real wages and incomes.

Today we hear that UK retail sales fell in October and remained broadly flat over the past three months. This followed fairly strong sales growth in the three months to September, with UK retail sales volumes growing by 1.6% in the quarter and Scottish retail sales growth a little weaker at 1.1%.

Of course this might just be a one month blip and the growth of retail sales and domestic demand could well pick up again, boosted perhaps by positive contributions from net trade. But in Scotland there are signs from the latest official statistics of some slowing in domestic demand to the second quarter of this year.

Yesterday, the Scottish Government published Quarterly National Accounts from the Scottish National Accounts (SNAP) project. These data are still considered to be "experimental" but to my mind they are very valuable nonetheless.

Using these data we can compute the contribution of the major expenditure components to nominal - includes price change as well as volume change - GDP growth in Scotland. I have done this first for the year - four quarter on 4 quarter - to the second quarter and the results are in the following chart:

These data show that with nominal GDP growth of 1.8% over the year by far the most important driver of growth was household spending. There was also a small positive contribution from Government but net trade and investment made a resoundingly negative contribution.

However, if we just look at the second quarter of this year we get the next chart:

With nominal GDP growth of 1.3% in the quarter, by far and away the main driver of growth was net trade as Scotland's large trade deficit reduced a little due to growth in the value of exports of 1.3%, while the value of imports (including account balancing items) fell by 0.3%. Domestic household spending was actually flat. However, the spending of non profit institutions serving households and non-resident household spending made the overall household contribution slightly positive. But note the contribution to growth was less than government spending.

It might be reasonable to respond to this by pointing out the now positive contribution of net trade. Maybe this does indicate that the long awaited re-balancing of the economy away from domestic consumption to external demand and investment is occurring.

But wait!

Today's news also revealed that eurozone growth was much weaker than expected in the third quarter with the FT reporting that

The weak performance in France will cause particular concern over the durability of a broader eurozone recovery.....

With growth almost flat and inflation verging on deflation it is clear why the ECB cut its rate by 25 basis points last week.

We are not out of the woods yet.

Comments

[Ian Jenkins]

..... former US Treasury boss Larry Summers has recently suggested the West has an economy whose normal condition is one of inadequate demand. Anything close to full employment will only be achieved if governments create bubbles - a cause of the financial collapse on 2008.

Paul Krugman reports this, and the consequence that central bankers need to stop talking about “exit strategies.” Easy money should, and probably will, be with us for a very long time. More broadly, if our economy has a persistent tendency toward depression, we’re going to be living under the looking-glass rules of depression economics — in which ... attempts to save more (including attempts to reduce budget deficits) make everyone worse off. Depression rules will apply for a very long time. ..... (Edited by BA)