U.S. recovery growth is slowing – Q2 at an annualised 2.4%, below the forecasted rate and much less than the 3.7% for Q1 – debate is very much now whether another stimulus is needed

UK consumer confidence falls to lowest in four years – as measured by the UK’s index of consumer sentiment – take a look at the 5 year chart here to see how far off we are from pre-recession times.

House prices fell 0.5% in July according to Nationwide – the first since February and larger than forecast 0.2%

M4 lending at lowest level since records began in 1964 – some believe this may be counterbalanced by firms increased investment spending over decreased borrowing

Selected comment;

Hamish McRae: The subtle hand we must play on trade “we have to recognise both that it is not just the BRICs that matter and that selling services to a host of different countries is going to be a tricky, subtle task. But that is what makes life interesting for the UK. We have a really interesting hand of cards to play and it is good to see that our new government is trying to play it with sensitivity. See David Cameron’s comments in Turkey in that light”. The Independent.

Jeremy Warner: Whatever happened to the rebalancing act? “After years in which many Western countries had become dependent for growth and prosperity on debt-fuelled consumption and property inflation, there would be a miraculous rebalancing of the world economy into a more sustainable order of things. What is the evidence for this happy transformation in economic dynamics actually taking place? Virtually none, I’m afraid to say”. Daily Telegraph.

Sir Samuel Brittan: Take central banks down a notch “no major central bank had any inkling of the weakness developing in the world financial system. There was the obstinate refusal to take asset bubbles seriously and the wrongheaded preoccupation with short-term targets for narrowly defined inflation indices. In the background was a shift from an excessive preoccupation by central banks with financial institutions to the other extreme of their becoming virtual econometrics factories.Yet despite everything I would still support central bank independence, if for no other reason than that no body has a monopoly of wisdom”. Financial Times.

N.b. M4 money supply – as explained by wikipedia here.

A slower recovery than hoped for by the Office for Budget Responsibility – according to the NIESR – 1.7 v. 2.3 for 2011 and 2.2 v. 2.8% for 2012

Mervyn King concerned about lingering inflation – but doesn’t  want to raise interest rates for some time

Retail sales grow at fastest rate in 3 years – the CBI distributive monthly trade survey – Howard Archer of Global Insight claims good weather, discounting and the World Cup

Bank of England loses £5.5bn on QE – losses on gilts not corporate bonds. But Ray Barrell of NIESR says QE lifted equity and house prices by around 10pc and adding about 0.5pc growth to GDP in both 2009 and 2010.

Selected comment;

Ambrose Evans-Pritchard: Drip after drip of deflation data “In the end, the global macro economy will dictate the outcome. So watch the Chinese banking system. Watch Japanese exports. Watch OPEC as it keeps cutting output to hold up the oil price. Watch Euribor rates and the continued contraction in eurozone lending to companies. Watch French industrial output. Watch Polish sovereign debt (that’s a new one). Watch the M3 money supply in the US as it contracts at a 10pc annualized rate. And for goodness sake watch the Fed Board”. Daily Telegraph.

Allister Heath: Honeymoon is over for the coalition “the consensus view in the City is faulty – or at least subject to much greater risks than most people understand. Everything is predicated on the coalition staying on course and delivering all of the budgetary cleansing it has promised. Yet even though almost none of the cuts have actually happened yet – as opposed to being trailed and debated ad nauseam – the coalition’s popularity is already in free fall. The honeymoon period is coming to a premature end” City AM

Robert Skidelsky and Michael Kennedy: Future Generations will curse us for cutting in a slump “In 1937 Keynes wrote: “The boom, not the slump, is the right time for austerity at the Treasury.” Financial Times.

Guy Monson and Subitha Subramaniam: Austerity drives can unleash confidence “there are limits to Keynesian interventionism. As the state gets larger and larger, the multiplier benefits of government spending become smaller and smaller, and taxing the working many to support the non-working few eventually leads to a system of the working few supporting the non-working many”. Financial Times.

Sean O’Grady: A little heartbreak but few surprises from Mervyn King “Mervyn told us what most of us already knew – that the banks still aren’t lending enough, there isn’t much competition in the area and inflation will stay above 2 per cent for “much of next year”. Mr King said it was “heart breaking” to see the way some businesses were now being treated by their banks, the reverse of good “relationship banking”. Quite right too”. The Independent.

1. House prices – already falling again, on a monthly basis. There could be much worse to come if Capital Economics is right, a 5% fall this year, 10% in 2011 and 10% again in 2012. And NIESR is today talking about a real terms decline in house prices below inflation over the next 5 years, taking the average home back to 2003 levels. The bottom line is that house-owing consumers will be less inclined to spend if they think the value of their homes is going down, a lot, for some time.

2. Unemployment – the big surprise of the recession is how little it went up. We’re now at 7.8%. But there’s a lot of people working part-time who’d rather be working 9-5, or who took pay cuts to hold onto their jobs,  and with bank balance sheets still as weak as they are, there’s not much credit to fund investment in new jobs which would be normal at this stage of the cycle.

3. What’s happening in America – if you accept that the UK is around 6 months behind the USA in its cycle, then the slowdown in the US economy driven by US consumer sentiment and renewed housing worries is troubling indeed.

4. What’s happening in Euroland – not much good news from there either – some sort of breakup of the Euro is still on the cards, probably just postponed and growth is anaemic.

5. Sterling – there were high hopes that the pound’s fall in value of around 25% against the dollar and the euro which started in summer ’08 could help lead us out of recession with more competitively-priced exports. Unfortunately, the UK is starting to look like a relatively safe haven and Sterling is going up again. It’s quite possible before the end of the year that it may reach 1.75 against the dollar and 1.40 against the euro not because that’s what it’s worth but because all currency movements have a habit of overshooting. That will obviously hurt exports, but would reduce the cost of government debt as gilt yields are driven down by investors. Which makes me think, what is the precise trade-off on that one?

Anyway, if we’re going to have a negative quarter – and obviously, I’d much rather be wrong – I would bet on it happening in Q1 of 2011.

1. The stunning 1.1% quarterly GDP growth figure for Q1 – twice that anticipated by most UK economists – see Reuters
2. Ernst & Young Item Club forecast interest rates to stay at 0.5% until 2014. The Item Club.
3. House prices fall for the first time in 15 months – according to Hometrack, 0.1% in July, the first fall since April 2009. See here.

Selected comment;

David Smith: Growth leaps but it’s a creditless recovery “. . .even amid the warm glow of an economy recovering faster than expected . . . strong growth alongside very weak lending adds up to a creditless recovery. The question is how long this creditless growth can continue.” Sunday Times.

William Keegan: The legacy of Lady Thatcher haunts Osborne still “The chancellor is right to want to break with the last two governments and actively rebalance the economy. But his obsession with deficit-cutting is old-school Thatcherism at its worst”. Keegan also queries the wisdom of the Chancellor banking on a continued loose monetary policy to offset a tight fiscal one . . . “At the moment the hawks on the monetary policy committee are in a minority. It would be unfortunate if we had a savage fiscal policy based on the assumption that monetary policy remained “supportive” and then the Bank acted in a way that made nonsense of that assumption – would it not?” The Observer (guardian website).

Roger Bootle fears an extended period of low growth and rising unemployment more than a double dip: Right, I’ll see your double dip and raise you an economic black hole “So far, the recovery has been better than almost anybody expected. But only when the cuts (and tax rises) start to bite will we see the real challenge. Accordingly, for the UK I think that the second scenario of several years of disappointingly weak growth should be regarded as the central case. Mind you, it lacks a catchy name to compete with “double dip”. Did I hear someone suggest “economic black hole”?” Daily Telegraph.

Preliminary Q2 GDP – to be released by the ONS here. Expected 0.6%.

Index of Services – for May.

BBA Loans for House Purchase – for June.

Big themes of the day;

The two most important Central Bankers of the world voice stark differences on policy . . .

ECB President Jean-Claude Trichet calls for cuts in public spending and raising taxes to consolidate the recovery. US Federal President Ben Bernanke says it’s too soon for austerity and that we should maintain stimulus in the short term.

Comment and blogs;

David Blanchflower: For once I agree with Osborne “It is clear from listening to Chancellor George Osborne’s testimony to the Treasury select committee on 15 July that he believes monetary policy should remain loose, and I agree with him on that. Rates must remain, as the FOMC put it, at “exceptionally low levels for an extended period”. Plan B would mean further quantitative easing and lots of it. The New Statesman.

Allister Heath: Strong US Profits good for recovery “My biggest worries over the coming months are not what concerns the mainstream (which is obsessed with the impact of fiscal tightening) but rather what will happen to the US money supply (there have been some worrying signs that it may be dropping uncontrollably) and the impact of new rules on the US financial system, including increased capital requirements (which force banks to lend less) and Barack Obama’s new mammoth reform bill (which is already threatening chaos for asset-backed securities and could hit corporate financing). In the meantime, the earnings numbers suggest a traditional cyclical recovery; let’s enjoy it.” City AM.

Hamish McRae: It is no good squealing about dodgy borrowers who cannot get bank credit “Politicians focus on the lack of lending now, both to companies and on mortgages, and make vague, threatening noises about making banks lend more. But that is plain silly. The problem of lack of lending is not really anything to do with British banks; it is the withdrawal of foreign banks.” The Independent.

David Miliband: To grow, Britain must solve its jobs deficit “By committing to the largest fiscal retrenchment in living memory the coalition has gone for broke. The prime minister says it will “change our way of life”. That’s the problem. Ken Clarke used to say that good economics is good politics. The government has turned this on its head. Framing the debate as a choice between the public and private sectors is certainly good politics, but it is bad economics. The Budget will force 600,000 public sector workers into unemployment. With recent surveys suggesting rapidly worsening business confidence and no evidence of an emerging hiring spree, their prospects of finding work in the private sector are bleak.” Financial Times.

Jeremy Warner: Is a double dip recession heading our way? “The good news is that most of the evidence still suggests that a double dip is unlikely. Today’s second quarter GDP figures ought to show continued recovery, albeit at an anaemic rate, and few of the most commonly watched forward indicators yet point to the economy falling back into the abyss.That is not to say that the economic winds are once more set fair; plainly they are not. The odd quarter of negative growth over the next year or two seems more than likely. The one thing we know for sure is that the path to full recovery is going to be slow and uneven.” Daily Telegraph.

It is a pretty staggering set of statistics that;

across government £94 million has been spent on the construction and set up and running costs of just 46 websites and £32 million on staff costs for those sites in 2009-10. The most expensive websites are:

• uktradeinvest.gov.uk which costs £11.78 per visit; and
• businesslink.gov.uk which costs £2.15 per visit.

Read the original report here. As I wrote some 18 months ago, I suspected that the cost of public  body/quango websites would be hard to justify and a future government should aim (amongst other measures) to achieve

Full disclosure and ranking for each quango of website expenditure and the consequent number of impressions and visitors and downloads (suspect quite a few scandals here – government websites tend to be very expensive and ineffective, there may be some successes too, let’s find out!)

I just didn’t know how bad it was.  To be fair, this process started long before the arrival of the new government the previous government had already shut down a lot of websites. So the Cabinet Office can’t actually take all of the credit, just some of it. But the openness vis a vis the release of raw data from the coalition is a very big departure from the past and to be welcomed.

Now we need to know what are the google search terms all these bodies are bidding on and what is their budget for it?

This would constitute the proof that government service providers are crowding private sector providers on an hourly basis. I’ve no doubt that they will have succeeded in bidding up the cost of google advertising for the private sector, so it’s only fair to know which ones for them not to compete with.

In contrast, the magazines though are a delight. They are a whole new level of vibrancy, content-rich and colour – as good as America’s newspapers are bad. And so to the theme of this post.  Today I picked up a copy of the Yale Economic Review – an academic magazine no less that I could actually buy in the shop. Would that be so in England !

In a piece entitled “A New Measure of Economic Performance”, Daniel Hornung points out that measuring growth in production, as in GDP, does not impart good information about actual living standards. Citing a report by Stiglitz and Sen,  amongst other points he posits that’s what needed is a measure that takes into account income and spending.  How much people are taking home and prepared to spend is a much closer indicator to how well off they really are.

Of course in most countries, we know what the data is on income and spending, the questions is how to roll it all into one and get something better than GDP?

The original report was commissioned by President Sarkozy and can be dowloaded here.

These figures though are a somewhat meaningless national average which actually contains extremely diverse regional bursts. Just look at the breakdown of those figures on Nationwide’s website here.  So here are  just two reasons for pessimism.

The ascendance of Sterling – you may recall that foreign buyers and foreign direct investment in general is at its strongest when the pound is at its weakest. Last year, there was actually quite a lot of buying at the premium end in upmarket areas by wealthy foreign investors. Since the beginning of the year, the nascent implosion of Euroland has led to a flight to relative quality – UK Gilts, driving up the value of the pound, but not to UK housing which is typically purchased through debt rather than cash in hand which you can’t get out of easily either.

A Capital Gains Tax rise – if you can’t risk a lot of your capital to make a substantial gain from buying property would you do it?

Probably not and the government should take note. Personally I’m all in favour of people making Capital Gains and big ones, especially if Banks are still not lending, consumers aren’t spending and the scope for government to increase aggregate demand through Keynesian pump-priming is limited by the size of the budget deficit. So it seems to me reasonable to aim long-term to reduce and eliminate all taxes on capital like CGT. Unfortunately Britain’s LibCon coalition does not see it that way and there are plans afoot to raise it considerably.

I hope very much that they will agree to something like John Redwood MP’s excellent compromise involving tapering relief.  Mr Redwood gave a superb and ever thoughtful speech to the EPC the other night some of which he flagged up on his blog here.  And because bank lending is still so meagre, the government could also endeavour to make tax-free gains made by retail investors who risk their capital on the purchase loan market organised by Zopa.

1) Whilst they may be no more expensive than using a government department, quangos are not always the best vehicle to deliver public services – in an age where the no. 1 problem is a lack of money, competing companies driving down costs are. There really is huge scope for marketising public services.

2) The Cabinet Office has not produced a proper report on Public Bodies since 2006 which then said that the total government funding for Public Bodies was over £120 billion and their combined budgets were £167 billion. Even then, the 2006 report only had a smattering of bodies from the devolved administrations of Wales, Scotland and Northern Ireland.  So the actual figure now for spending  using that 2006 report as a baseline is almost certainly higher today. Consequently cutting £500m from the quango budget is very small beer.

3) Don’t focus on the number of quangos (around 1200 right now) – they can easily be merged. Instead look at the functions they perform and see if that is something that can be outsourced.

4) Don’t hold your breath for a bonfire of the quangos – all previous bonfires tend to be small conflagrations quickly extinguished by a new minister’s latest penchant for action. The test is will the Coalition continue the quango rollback in years 2, 3 and 4 and will it exceed the new ones they create themselves?

5) Politicians like to bash quangos because they are the only part of the public sector that the general public like to see attacked with impunity. It also helps that they are largely non-unionised.

6) We need much more fluidity between the public and private sectors to break down the them and us ethos. Quangos, working under competitive pressure to deliver public services are a not a bad way to do that. It’s just that they don’t.

7) Advisory Bodies are a cheap way of government getting in outside expert opinion.  They tend to make up most of the quangos in numbers terms.