A Little Bit of Good News

The Construction Industry Is Leading the Way as the Economy Grows

The latest growth estimate (which may be revised later) shows the British economy growing by 0.8 percent in the second quarter. This was better than most “experts” had predicted, after recent retail sales and housing market data were weak. (Retail sales went down 0.2 percent in September.)

Growth during the Labour years came from booming retail sales (supplied by imports) and a house price bubble, so naturally if those things are now weak, the experts expected growth overall to be weak. They had assumed that the economy has not changed. And yet, the truth is that we do need to rebalance our economy, with more production, more exports, and less consumption.

These are just one set of figures – but they suggest that this just may be beginning to happen.

The BBC makes great play of the rise in construction output (which grew at 4 percent) and claims this is only because:

The building industry has been dealing with a backlog of work that had been postponed from the beginning of the year due to bad weather.

which conveniently overlooks the fact that if this is true, then the strong figures in the previous quarters were achieved in the face of a drag from that same poor weather.

There are other positive indications in that same BBC report that give some cautious grounds for optimism.

Manufacturing grew by 0.6 percent, and services also grew by 0.6 percent.

And the fall in retail sales also points to that much-needed rebalancing.

So the overall picture is output growth in construction, manufacturing and services, with retail sales and house prices both falling.

And those are all the things that we need to happen, if Britain’s economy is ever to be based on something more substantial than ever larger borrowing and artificial asset price bubbles.

These are early days – it’s probably a bit early for George Osborne’s triumphant description of the figures as “a vote of confidence in the new government’s economic policies”. But the figures are all good news. Gordon Brown’s artificial deficit-driven boom may be over, but it seems that a more soundly based growth may be taking root.

More Economic Policy Madness – This Time from the Telegraph

The Bank of England Needs Reminding that Inflation Doesn’t Cause Economic Recovery

Philip Aldrick, the Economics editor of the Telegraph, has been drinking deep from the well of discredited economic theory.

He points out that inflation is becoming a stubborn problem, and says the excuses of the Bank of England are beginning to wear thin. And then goes on to urge the continuation of the policies that have led to it.

With the economy so precariously poised (both business and households have stressed how important low rates are to survival), it is vital the Bank stays ahead of the game.

Businesses and households haven’t stressed how important low rates are to survival. They have stressed how important the availability of credit is to survival. Low rates means lower supply of credit, just as low prices for bread means lower supply of bread. It’s called the price mechanism. Higher rates would increase the incentive to deposit money with banks, and increase their incentive to lend that money to borrowers.

GDP growth, though, will be lower than predicted due to the Government’s spending cuts – making “loose monetary policy”, or low rates, ever more urgent.

Government spending doesn’t create growth. It reduces output in fact, regardless of how it is financed (by taxes, borrowing or money printing). The spending cuts will lead to growth. (Yes, really.)

Loose monetary policy doesn’t create growth either. It simply increases prices – i.e. causes inflation.

There is no quick fix for this. Regardless of the actions of the Bank of England, Britain has been living beyond its means for years and we have to stop now.

All the government can do is be responsible – which means getting the deficit down (to release resources for the productive economy and allow growth to occur) and putting interest rates UP (to control inflation).