A fall in confidence that could end in double dip

The Chancellor can no longer sit idly by.

By David Blanchflower Published 30 August 2011 17:09

I am beginning to sound like a broken record as the bad data news on the UK economy continues to pile up. Things on the economic front are really not good and, most worrying, are worsening fast before our very eyes.

The major release of the results of the European Commission Economic Sentiment Index, based on business and consumer surveys in August 2011, was a real shocker. The index is made up of five components based on business surveys in industry, services, manufacturing and retail, as well as a consumer survey. These are conducted in identical form in all 27 member countries and are available as a pdf file or can be downloaded as Excel files. Check them out -- they are scary!

In August, the ESI declined by 5.0 points to 97.3 in the EU and by 4.7 points to 98.3 in the euro area. This decline resulted from a broad-based deterioration in sentiment across the sectors, with losses in confidence being particularly marked in services, retail trade and among consumers. Only the construction sector in the euro area recorded an improvement.

Among the largest member states, Germany (-5.7 points) and the UK (-5.6) reported the strongest decreases in sentiment, followed by Poland (-3.6), the Netherlands (-3.0) and, to a lesser extent, Italy (-0.7), while the ESI remained broadly unchanged in Spain (-0.3). The ESI remains above its long-term average only in Germany and stands at 92.9 in the UK, having fallen from 104.6 in March.

Consumer confidence has continued its steady fall and is now at around the same level it was in May 2009 -- and it continues to drop.

Retail and services confidence

Of particular concern in the UK, though, was the dramatic collapse in confidence among businesses in services and retail. This is illustrated in the graph (above), which shows the sharp fall in both surveys over the past three or four months. This is of particular concern, given that the two surveys tracked very well the collapse of output at the onset of recession.

The two surveys started to fall sharply from March 2008 as the economy headed into recession, which was dated as starting in the second quarter of 2008, based on negative GDP growth.

We are able to explore further the reasons for the fall in both sectors as the European Commission provides more disaggregated detail. It is apparent that in both sectors, demand has fallen markedly and expectations for the future are increasingly pessimistic. Retailers are reporting rising inventory levels due to lack of sales.

Evidence of doom and gloom in the massive service sector was also reported on Tuesday in the CBI's survey of service-sector firms. Business volumes fell in the UK services sector in the past quarter, at the fastest rate since November 2009, the CBI found. Firms in business and professional services, which had been growing slowly, saw volumes contract unexpectedly.

Volumes of business in consumer services also fell -- and at the fastest rate since November 2009. Richard Woolhouse, the CBI's Head of Fiscal Policy, said:

Activity has fallen across the services sector for the first time since November 2009. This quarter we've seen more evidence of the ongoing decline in consumer services spending, as people with increasingly squeezed household incomes are forced to cut back their discretionary spending.

The concern is that this drop in business and consumer confidence is a prelude to a double-dip recession. I assume that the Chancellor George Osborne will continue to assert that his policies are working. Now that both businesses and consumers are running scared, however, Osborne can no longer sit idly by and assert that all is well. It is time for further fiscal stimulus.

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28 comments

Wed, 2012-05-09 05:18 — WallaceNeville

We need economic management that is the supply side focused and planned over the long term - short term ineffectual stimulus inhibits supply side improvement and will not fix the problems. UK politicians have proven they are incapable of being trusted so fiscal policy needs regulating. http://www.grantsforcollege101.com/

Wed, 2011-08-31 16:21 — David Blanchflower1

Mr Divine
Just like the economy the fishing isn't good right now
A hurricane is bad news all round
Danny Blanchflower

Wed, 2011-08-31 17:43 — Indu Pendent (not verified)

Hurricanes are inevitable and long term provisions need building to manage the risks.

Wed, 2011-08-31 18:20 — Marcus (not verified)

I blame our economic troubles on career politicians and Marxist economists obsessed with John Maynard Keynes.

Remember, he comprehensively lost the ongoing debate with Friedrich Hayek, but due to the post-war rebuilding we as a society seem to have ended up going in completely the wrong direction.

I firmly believe that the 21st century will see a change and gone will the social economic model we see in Europe today replaced by true libertarian values and a massive concentration on wealth generation rather than wealth distribution and socialism.

We are beginning to see this in the United States with the steady rise of Ron Paul and Austrian economics returning to prominence over the past decade.

Any double-dip recession would and should see the rightful death of Keynesian economics.

Wed, 2011-08-31 19:29 — Luddite (not verified)

A fall in confidence that could end in double dip. David you've started to sound like Nostradamus, nothing but darkness and pending disaster, it's becoming BORRRRRING!!!

Wed, 2011-08-31 20:01 — Indu Pendent (not verified)

@marcus

Would add a lesson from history is that Hitler understood and was a keen Keynesian - the Nazi's borrowed massively focussed on manipulating voter preferences. Had they not had gone to war the bubble would have burst and their economy would have collapsed. There are parallels with the £350Bn borrowed by the UK before 2008.

Like you say, we need economic management that is the supply side focussed and planned over the long term - short term ineffectual stimulus inhibits supply side improvement and will not fix the problems. UK politicians have proven they are incapable of being trusted so fiscal policy needs regulating.

Many of our families paid a high price fighting the Nazi's to avoid the price our kids are now having to pay due to the debt mountain.

Keynes 2 Humanity 0

Wed, 2011-08-31 20:38 — matthew fox (not verified)

Ed Miliband's family paid a high price fighting the Nazis.

His father, served in the Royal Navy during WW2.

I am surprised Indu Pendent hasn't produced evidence Keynes helped construct the gas chambers.

We have seen supply side economics in action, Reagan and George W where great proponents. Both Presidents made sure the future generations picked up the tab.

Wed, 2011-08-31 21:57 — Awake!

yes yes matt, but whilst the right in america were doing whatever they were doing, the left here were royally stuffing it up here That's indus point, but your grasshopper attention span misses it everytime- if we don't LEARN FROM OUR MISTAKES, then how do we avoid them? u mention gaschamebrs, well people spoke of learning from mistakes after WW2, and kids like u with no responsibilities or historical context to draw on don'd even imagine how badky this could all end-
Whilst arse holes like u and your numbskull political heroes mates fucked around with wanky non-relevant comments and policies, a 5 year mini ice age or 3 year freak weather pattern causes world foot riots cos we're not integrated enough... it's called fixing the roof in the summer in anticipation of a winter. You can't imagine that because you and your mates are jealous moron zombies who come from a line of people who've never successfully managed anything. Brown showed us that this jealous 'left' in the country, devoid of labours real roots, who have no concept of paying for maintenace of a property- weird really, cos this left is led by a bunch of well off liberal lefties, oxbridge types who've never ACTUALLY worked, career poloticos, but mum and daddy gave them a leg up (i do not object that's what parents do) but then they waste it getting a bunch of state scroungers to folow them so they can become 'leaders'- ure one of these morons matt, hoping to get into management i guess...

Wed, 2011-08-31 22:45 — C Baker

What sort of fiscal stimulus? Making the state larger? Used to finance what exactly? What will the returns/benefits of more fiscal stimulus be?
There are too many costs outside the control of the average household I feel. If we lower vat, cut taxes, encourage more retail spending, this will not necessarily help in the long term. It may help China and Tescos.

It is the cost of housing, rents, mortgages, water, gas, electricity and rising food prices that are crippling most households financially. The last thing people want is to take on more personal debt. People should not be encouraged to take up more as debt worries can be very detrimental. There is little disposable income left at the end of the month due to the basics and essentials being so expensive and rising all the time.

There is no easy solution. Recently foreign commentators have been blaming our rubbish education system and how we have lost our entrepreneurial spirit and heritage of innovation and invention.

We need to get this back if we are to play a lead part in the technological age. But the rising world population and scarcity of resources is the biggest threat.

Tue, 2011-08-30 17:31 — Paul Hillyard (not verified)

David, keep telling it as it is.

Thanks for your insight.

QE2 on the way but will it work?

I doubt it.

Massive state investment in the infrastructure, incentives to take on young people and a real regional policy are needed but I won't hold my breath.

Thu, 2011-09-01 06:50 — Mr. Divine (not verified)

Why let a little hurricane stop you from getting on your boat and plonking the rod in? Afraid of getting a bit wet?

Tue, 2011-08-30 19:28 — matthew fox (not verified)

Conservatives seem to ignore confidence surveys, they don't go alone with the Right Wing narrative.

Tue, 2011-08-30 20:18 — REPAY

With governments running on empty and the inability to spend on the right things the west is enfeebled for the foreseable future. I am surprised that readers here continue to put so much faith in the state and politicians. We had 10 years of big spend and got almost nothing except a new cardre of rich (private & public sector - the latter with unbelievable benefits) and some PFI deals which will be mills round our grandchildrens' neck. In the US the stimulus money evaporated into the banks who use it to buy T-bills and make a riskless return.

Tue, 2011-08-30 20:23 — Awake!

David, keep telling it as it is??
that we're bouncing along at flat growth/small positive/small negative?? reporting economic numbers is INSIGHT?? or sayint the solution is fiscal stimulus is INSIGHT?? Wow, Shakespeare had the major human interests covered.. Insightful eh??
At least mr Hillyard makes an opinion on whether QE will work.
Mr Hillyard, why should the young be 'targeted' for jobs? should we not rather be asking ourselves why employers would rather send more on older folk? And in the cold storms that are definitely heading us, shoudn't that be the case, that family breadwinners get the assistance?? The young need to pull their weight, they have more energy so use it-jeez, it's their duty to the society that raised them!!
Seriously, this can't be a left wing site. no debate, pandering to the workshy whilst family men are looking at the wrong end of a couple of barrels, backslapping all round cos 'our man in the know' just done a copy paste rather swift..Where is David milliband when u need him- that guy needs to d a stint in a business so when he's called on he can look the elctorate in the eye and say he's done a day's graft in his life....
matt- 6 million barrels under labour son, glad u bought the oil up now...

Sun, 2011-09-18 08:35 — Benedict

Eurozone countries have given up their monetary sovereignty by abandoning their national currencies and adopting the euro. By divorcing fiscal and monetary authorities, they have given away their public sector’s capacity to provide high levels of employment and output.
http://www.diyhomerenovations.org

Tue, 2011-08-30 21:25 — Eddy S (not verified)

danny, i was quite surprised to hear you're a tax cutter in your previous post.

we do need to cut taxes on productive assets such as income and business taxes, i believe we should do that for the lower and middle income ranges by increasing the tax free threshold (by as big a margin as possible i.e. let everyone earn upto 15k tax free - that will help the many and increase the incentive of work too - at the same time i believe we should cancel tax credits as we do not need to hand out what we do not take - saving on gov't admin and significant fraud).

we also need to re-configure gov't spend heavily from admin style non-jobs to infrastructure spend. i would reduce corporation taxes to around 18-20%. a tax on wealth such as a land tax on immobile non-productive resources would balance things out and will also ensure we provide better incentives on productive assets by reducing income taxes.

at the same time why not use this time to invest in green energy and other growth areas. if anything it will help increase our energy independence and support future growth.

finally, we should ask ourselves what are we going to sell in the economy of the future? the answer is not gov't admin jobs and the sooner we learn this lesson the better for the economy.

ps. you may note that fiscally i would not change the current position significantly, instead i would change how we spend our valuable tax income.

Thu, 2011-09-01 12:21 — Marcus (not verified)

When an empire loses its drive, loses its edge and concentrates too much on internal wealth distribution then they are doomed to fall.

Socialism and social economics has been proven to fail utterly.

The west is doing both.

What we see from a lot of economists and politicians across the western world today is excuses and policies and events and debates all aimed at mass distraction.

Miliband, Cameron, Clegg. They do not have a grande plan to turn the economy around as they too are slaves to social economics and Keynes. They are therefore the distraction and we are all sleepwalking into economic oblivion.

I fear this will not end well.

Wed, 2011-08-31 02:22 — haisaif1

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Wed, 2011-08-31 07:54 — Luddite (not verified)

Paul Hillyard: No one can ever deny Labour didn't spent. But were there is no argument!! Labour didn't invest but squandered on a humongous scale.

Wed, 2011-08-31 10:40 — frances smith (not verified)

time for a fiscal stimulus is it? it depends on what sort of fiscal stimulus you have in mind, as we are now learning the extent to which QE has increased commodity prices, which is probably now creating inflation problems for both consumers and manufacturing. clever idea that, wasn't it.

so we are sort of stuck, i said somewhere else, yesterday, that is like we are at the end of a game of monopoly where one player (the financial sector) has all the properties, all the houses, and all the hotels, and everyone else can't even afford to go round the board, even with our £200 after passing go!

in civilised households, when this situation arises, the game ends, and everyone goes back to the beginning and the money is redistributed. but oh no, david blanchflower doesn't want to do that, he wants to carry on playing, he wants QE, to give more money to the winner, while encouraging inflation, so our £200 runs out even faster!

Wed, 2011-08-31 12:08 — Mr. Divine (not verified)

HiyA Danny: How is the fishin going?

SUMMER ALMOST GONE

not down under

Wed, 2011-08-31 12:55 — peter hack (not verified)

QE is "printing money" for the rich by the rich and they are surprised when the poorest rise up ?

Why should we subsidise the banks any more ?

Wed, 2011-08-31 13:16 — Mr. Divine (not verified)

danny: I got 4 loads of free horse manure in my ute these past 2 days. me wife bought about 10 tomato plants.

I've got loads of veggies growing ..what are the odddddds that they will be successfullllll?

what figures have ya got????????

Wed, 2011-08-31 13:20 — Mr. Divine (not verified)

come on DANNY i know you've got some figures hidDenN up yer sleeves .. waht are they? will ME tomatoes have toes? will ME cucumbers have tummies?

DON'T KEEP IT UNDER YER UNDIES YA ECONOMIST COMMENTARIST

Thu, 2011-09-01 22:51 — haisaidd

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Wed, 2011-08-31 13:22 — Mr. Divine (not verified)

that should be you INSIGHTFUL Economist commentator.

Wed, 2011-08-31 13:24 — Willp

For sovereign nations like Britain, slow, or zero, growth will add to, not cure, deficits and raise debt ratios. The coalition's austerity policies lower growth but increase budget deficits. Attempts to balance the budget will only damage the real economy as incomes and employment fall.
Eurozone countries have given up their monetary sovereignty by abandoning their national currencies and adopting the euro. By divorcing fiscal and monetary authorities, they have given away their public sector’s capacity to provide high levels of employment and output.
Greece is being forced to cut its budget deficit in a recession by cutting public sector wages, pensions and jobs, which will only worsen its situation, and the eurozone’s. The imposed austerity will not reduce the deficit, since slower growth will reduce tax revenue.
Instead, Greece has to exit the euro, regain monetary sovereignty, run budget deficits that are large enough to achieve full employment and default on the euro-denominated debt. This would relieve the newly sovereign government from being at the mercy of markets, rating agencies, and other countries, and enable it to fully use its labor resources.

We need to invest in growth, invest in industry, for example by taking the railways contract away from Siemens and giving the work to Derby's Bombardier workers.

Wed, 2011-08-31 13:37 — Indu Pendent (not verified)

@danny

Before 2008, UK industry declined at its fastest rate since the 1970's and 1 million jobs were moved out of the private into the state sector. We now have a depreciated industry and a massive structural deficit.

The additional stimulus in the dying spasms of the last government failed - there is no long term benefit to demand.

Legarde says
- start cutting future expenditure now (dont load the future with unfunded debt repayments)
- ensure debt can be financed whilst the economy is rebalanced (protect the AAA as top priority)

What she says strongly endorses the coalition which follows her text book closer than any other EU country or the US. She implies criticism for the UK for not cutting fast enough in the last year.

She criticises weak ineffectual policy makers who have not made the cuts necessary for the recovery.

Do you know why the opposition front bench has gone silent on cuts?

A silver lining - high unemployment lowers wages which together with lower asset prices drives competitiveness. Its part of the rebalancing with BRIC.