Economic Improvement Won’t Help Labour

November 19th, 2009 by The Parallax Brief

UK Polling report notes that despite polling trackers showing the economic expectations of voters have improved, this has had little impact on Labour’s opinion poll standing.

“Economic optimism has already returned. There are several different trackers following people’s expectations on the economy, they have all come back strongly since 2008 and early 2009, with some in positive territory. However, it does not seem to have produced any meaningful recovery for Labour. However, I’m still not ready to conclude for certain that it’s not going to have an effect – if an improved economy is going to improve Labour’s position in the polls, I think the trigger may be when the recession formally comes to an end, when the good news will no doubt be plastered across the media and the government will be primed to capitalise. That was expected in the last lot of quarterly economic figures, but never arrived. With the rest of Europe emerging from recession it must be very likely that the next lot of figures will show the formal end of the recession.”

What’s important to understand here is the difference between abstract terms and figures useful for measuring the strength of the economy, and the actual effect the economy has on the lives of individuals. It is unemployment, not GDP, which provides the lens through which voters view the health of the economy.

And unemployment figures are unlikely to provide any succour for incumbent governments anywhere in the developed world anytime soon.

The Free Exchange blog on the Economist’s website, explains the point:

“THE good news is, the OECD’s latest economic forecast revises up sharply projected economic growth for member nations. The bad news is, that still leaves OECD economies in pretty dismal shape. The organisation is now projecting that OECD members will grow by 1.9% in 2010, up from an earlier 0.7% forecast. The OECD estimates that the American economy will expand by 2.5% next year, where earlier 0.9% growth was anticipated.

It’s nice that expectations have risen, but we had all better hope that they rise more. In the two years after the end of the 1982 recession, the American economy expanded by 4.5% (1983) and 7.2% (1984), and at the end of that period the American unemployment rate was still above 7%.”

Similarly, the Parallax Brief noted in a previous blog post that:

“In both the 80-81 recession and the 90-91 recession, Britain’s GDP started moving back up in the 6th quarter after recession started, yet in the 1990-91 downturn, unemployment didn’t reach it’s peak until the 11th quarter. The 80-81 slump was even worse, with unemployment still at its high watermark in the 17th quarter — over four years after the recession started, and two and a half years after it finished. On both occasions, a full 19 quarters (nearly five years) after the recession started, unemployment levels were still above their pre-recession levels, despite GDP reaching it’s previous levels around three years after the recession began.”

That’s because unemployment lags GDP, moving up well after GDP recovers.

Even if the economy roars back before the next election — which it won’t — it is likely that unemployment will stay near its high watermark, or just as likely, continue rising. Given that personal economic hardship is far more important to individual voters than general economic health — especially when demonstrated by abstract numbers like GDP — it seems doubtful that the economy will give Labour much help.

Of course, rising GDP might make it slightly more difficult for the Conservative Party to beat Labour about the head with the Economy Breeze Block, especially if Labour can show that it has done better than might have been expected given the conditions, but it’s unlikely that Labour can get back into power through economic improvement alone.

And considering the mess we’re in, that’s exactly how it should be.

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Is Brown’s Anti-Unemployment Strategy Working?

November 12th, 2009 by The Parallax Brief

Charts which the Parallax Brief has found on the Office of National Statistics website (via Left Foot Forward), suggest that the Labour government’s efforts to combat unemployment may be more effective than often assumed, but also show that whether GDP improves or not, unemployment figures will likely offer Gordon Brown no respite on election day.

The chart below indicates just how bad this recession has been, with a decline steeper, and longer, than the previous big recessions.

However, as the next table shows, unemployment hasn’t increased by as much as in previous recessions. It started from a lower base than in 1990 and 1980, and has remained behind the curve set by both recessions.

Beyond the asinine partisan conclusions that could be drawn from these charts, the Parallax Brief wants to highlight two points.

The first is that the statistics show conclusively that unemployment lags movements in GDP. In both the 80-81 recession and the 90-91 recession, Britain’s GDP started moving back up in the 6th quarter after recession started, yet in the 1990-91 downturn, unemployment didn’t reach it’s peak until the 11th quarter. The 80-81 slump was even worse, with unemployment still at its high watermark in the 17th quarter — over four years after the recession started, and two and a half years after it finished. On both occasions, a full 19 quarters (nearly five years) after the recession started, unemployment levels were still above their pre-recession levels, despite GDP reaching it’s previous levels around three years after the recession began.

Yikes!

Even if we take the more optimistic early nineties scenario, unemployment will still be rising come election time.

The second point is that the government’s efforts should not be judged against unemployment levels in boom time, but how their predecessors managed in similar circumstances. In that context, it appears that Labour is, in fact, doing better.

But the Parallax Brief can’t escape the feeling that it is doing far, far worse than might have been the case if it had assiduously shepherded public finances during the good years. If the government had ran a surplus during the times of economic plenty, it would have had available the fiscal room for manoeuvre required for a truly effective blast against unemployment. But Labour didn’t so it wasn’t.

It’s probably true to say, then, that Labour has done well given the position it found itself in, but that’s a position of its own making.

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Does The Spectator Understand Economic Indicators?

November 11th, 2009 by The Parallax Brief

The Parallax Brief noticed today that both Guido and the Spectator concentrated on the latest unemployment figures from the ONS, offering them as justification for the argument that the country is not, as has been claimed by the government and some — less politically pure — sections of the media, on the road to economic recovery.

“…my lack of enthusiasm is partially explained by the fact that a 6,000 employment rise is not proof of recovery.

Britain is still visibly contracting, albeit at a decelerating rate. Vacancies fell by 1,000 and have never been at a lower level since records began in 2001. Economic inactivity, another indicator of unemployment and opportunity, rose again, but only by 0.1 per cent.

When every other major economy is recovering, Britain is stagnating.”

The Parallax Brief is tempted to call this deliberately disingenuous, but will at least wonder whether the Spectator quite understands what people mean when they say “on the road to recovery”. From a basic level of comprehension, a reasonably educated person should be able to understand that being “on the road” to something means that one has not arrived at the destination.

However, beyond this, from an economic standpoint, when we refer to the “economy” we’re almost always referring to GDP, not employment. To be sure, employment is often paramount in shaping people’s views of the economy, but when people say “the economy is recovering” they always mean, “GDP is starting to move upward again.”

Using unemployment figures to refute this, therefore, is rather like arguing that a pop song isn’t moving up the charts because you haven’t heard anyone whistling the tune on the street.

Unemployment will continue to rise even as GDP increases, because it is a lagging indicator, rising and falling six or eight months, give or take, behind GDP. So, while the Spectator is right to imply that America is recovering, by it’s own standards it isn’t, because unemployment is still on the up. That’s also why Britain entered technical recession before unemployment began to soar. But Guido and Speccie preferred to rely on GDP data back then, didn’t they?

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Downbeat GDP Figures Shock Economists

October 23rd, 2009 by The Parallax Brief

According to Bloomberg.com, Britain’s GDP dropped 0.4% for the third quarter, shocking economists. A Bloomberg survey of 33 economists had predicted a 0.2% increase. Lingering slumps in services, manufacturing and construction were primarily responsible for the gloomy results. Britain is now in its longest recession on record.

Bloomberg reports that, “The data, the first for the third quarter from a Group of Seven nation, suggests Britain may turn out to be the last of them to exit the recession sparked by the worst financial crisis since the Great Depression.”

Given that unemployment is what is known by economists as a “lagging indicator”, that is, its movements lag behind GDP movements by 6-8 months, unemployment will continue to rise well after any recovery, making it increasingly likely, in the Parallax Brief’s view, that the Labour Party will hit the polls on election day with unemployment either continuing to rise or near the high watermark — even if the Prime Minister delays until the last possible date

Clearly, these results will deal not just a short term blow to Labour by associating the government with yet more negativity for a 24-hour cycle or so, but will also have grave effects in the long term.

The Parallax Brief would also like to point out that the figures make fools of the monetary and fiscal hawks, such as John Redwoood MP and the Adam Smith Institute, who are already antagonising for a savage cuts in public spending and the tightening of monetary policy.

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