UK Recesson - Was That It?

Recessions are good. Not because of the human turmoil and unemployment they produce but because they are the only economic mechanism which correct poor resource allocation. Without this periodic "house-cleaning" nations accumulate wasteful companies, industries and institutions. The resulting inferior productivity costs jobs and wealth. It also engages workers in activity which are unsustainable. Arguably they are punished the hardest.

Here in the UK, our recession has appeared extremely mild so far as compared to the US.

Two Bullets - One to Come

We have actually had a bigger hit than most British people feel directly. Whilst nominal GDP has dipped mildly, "real" GDP has plunged massively. I believe the political definition of recessions is nonsensical. Nominal GDP does not take into consideration the massive loss of wealth of the nation from its currency devaluing.

Sterling has taken a caning against pretty much all currencies since 2007. It has almost halved against the Swiss Franc. Even against the much maligned USD, we are nearly 25% worse off. This does put the country in a hole - don't kid yourself that we are coming out of recession because there is 1% nominal GDP growth. If a British company wants to invest/enter a new international market, it will be 20-30% more expensive to so so than three years ago, just because of the weak pound. Put another way, that company has become 20-30% poorer on the international stage. The fall back position we are left with is to try and export our way out of trouble from a domestic base as now everything we produce is cheaper in a global market. Hopefully this will reduce our trade imbalance and help the country reduce its debt. If this happens, then Stirling will start to strengthen and real GDP can increase. That's quite a slog ahead and will take much longer than nominal GDP growth figures imply.

Second Bullet To Come

The second recessionary knock is naturally going to be the job losses in the public sector. It is difficult to see the private sector creating sufficient jobs next year to absorb these workers. Most concerning is that many of these workers have developed skills solely for the public sector which have little application in the private sector. Too many workers have been engaged in activity that just was not sustainable and it will take many years to integrate them into productive society.

My Beef With Nominal GDP Figures

Simply, it enables politicians to claim the economy is far healthier than it really is. It masks the fact that our economy plunged in 2007, and it will not recover for many years. Consumers increasingly feel this reality as they now have virtually no discretionary income due to soaring food and energy prices.