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The Economic equation & 0.2% Growth

Simple Economics of GDP.

GDP comprises of a number of elements and is usually summed up as follows

GDP (Y) = C + I +G + (X-M)

Consumption (C)
Private consumption which we are told is low due to poor confidence and belt-tightening due to VAT/ fuel / food price hikes.

Investment (I)

This covers investment in plant & machinery by industry.  UK businesses are sitting on Cash reserves at the moment of about 7% of GDP.  This is normal in periods of uncertainty.  Low consumer demand for products generally slows investment by firms.  Low levels of savings also inhibit banks ability to lend to SME & new business start-ups, so investment is likely to be low for a while.

Government spending. (G)

This is the phoney war at the moment.  The coalition is cutting spending right?  Not really.  It is not increasing the spending at the same rate as before and inflation is helping the cutting along (that is after the first year thump that George Osborne gave Public expenditure).  There are huge cuts in many areas and initiatives cancelled but Govt spending will rise from £632bn in 2010 to £713bn in 2015.  Apart from entirely unacceptable choices on how the public spending pie is cut it will have little impact on Govt section of GDP.  I will say that these figures come from the Budget of Mr Osborne and his inability to count has been a hobby-horse of mine.

Balance of exports and Imports (X-M)

What we export less what we buy in.  George Osborne wants to rebalance the economy to make up for his intention to reduce Govt consumption by massively increasing exports.  My worry is this.  Who are we going to export to?  EU is struggling (about half of our exports), The USA is skint with a default  week away (another huge market for us), Ireland (‘A significant and important partner’ GO) needed bailing out and loans which have been restructured (a default in another parlance).

Better hope China and India want to buy our goods then.

So overall, (and this whole post is a simplification) the main elements to deliver growth are struggling.

Consumption by households is  (vat/pay freeze/inflation/fuel/food costs).  Low confidence.

Investment by firms postponed

Government spending cut in real terms (too deep and too fast)

Exports sluggish due to world conditions.

Doesn’t make strong growth look very likely.

Plan B Mr Osborne, sooner rather than later if you please.

 

 

 

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