It's Official: Hello, Stagflation

Published in Investing on 27 April 2011

The economy recovered in the first quarter of 2011 -- but only back to where it was last summer.

So, we're back to where we were. That, in short, is the message revealed by today's release of the quarterly GDP estimate for the first quarter (Q1) of 2011. 

The figure in question: 0.5% growth, neatly reversing the 0.5% decline recorded in the last quarter of 2010.

In one sense, it's good news. A second quarter of negative GDP growth would have met the conditions necessary for a recession to be declared, and the impact of a 'double dip' on confidence levels would surely have prolonged what is already a fairly precarious recovery.

Even so, the news from the Office for National Statistics that GDP has returned to level it reached in Q3 2010 has a more troubling aspect. The apparent confirmation that the previous quarter's dip was largely down to December's heavy snowfall means that we've escaped recession only to encounter stagflation.

"It seems that when we strip out the 'snow effect', the economy has been suffering from stagflation over the past six months -- high inflation, and no growth in real terms," notes Azad Zangana, European economist at Schroders (LSE: SDR).

Jobs, inflation, and public sector borrowing

And, broadly speaking, that's certainly the picture seen in most other economic indicators. 

Unemployment, for instance, fell by a tiny 17,000 -- a modest improvement, certainly, but leaving the headline figure unchanged at 2.5 million. As a percentage of the workforce, the level is little changed since rising sharply in the first half of 2009.

Public sector debt, too, has remained largely static. Rising just £14 billion during the quarter, public sector borrowing -- excluding financial interventions -- stands at just short of 60% of GDP. 

A year ago, the comparable figure was £760 billion, equivalent to 53% of GDP, illustrating just how much the public sector finances continued to worsen during a period when the economy was technically out of recession.

Better news admittedly comes on the trade front. Although the balance of payments worsened during the quarter to an outflow of £10.5 billion, trade in physical goods finally exhibited the long-awaited recovery, with record exports helping to narrow the UK's trade deficit with the rest of the world to just £2.4 billion.

Inflation? At 4%, it's precisely twice the trigger point that is supposed to impel the Governor of the Bank of England to write an explanatory letter to the Chancellor. 

But with the economy so frail, and tax rises and public sector job cuts yet to bite -- not to mention high energy bills and food costs -- the Monetary Policy Committee is understandably nervous about raising rates too soon.

Macroeconomic indicatorsQ1 2011Q4 2010
GDP growth0.5%-0.5%
Consumer price index (CPI)4.0%3.7%
Public sector net debt£903bn£889bn
Net debt as % of GDP59.9%59.3%
Unemployment %7.8%7.9%
Balance of Payments-£10.5bn-£8.7bn
Balance of Payments % of GDP-2.9%-2.4%

Household finances

Once again, the base rate remained at its historic 360-year low for another quarter.

And that is just about the only positive piece of news that Britain's battered consumers received during a quarter that was notable for an unrelenting tide of gloom.

No wonder, then, that the household savings ratio rocketed up almost a tenth to 5.4%, or that consumer confidence plunged in February to a record low of 39 -- although a modest recovery at quarter-end saw the index inch up to 44.

No wonder, too, that gross mortgage lending fell sharply over the quarter, declining 12.5% to £30.1 billion.

And against such a backdrop, it's not surprising that the price of the average house fell to £162,379 -- a nominal drop of almost a thousand pounds, equivalent to an annual fall of 0.3%, although seasonal adjustments showed a 1% quarter-on-quarter improvement.

Household financesQ1 2011Q4 2010
Base rate0.5%0.5%
Savings ratio5.4%5.0%
UK personal debt£1.45trn£1.46trn
Average house price£162,379£163,244
Annual % change-0.3%0.7%
Quarterly % change1.0%-1.3%
Quarterly gross mortgage lending£30.1bn£34.4bn
Consumer confidence4453

The stock market

And what of the stock market? Again, despite oscillations over the period, the quarter-end levels are almost identical, with the FTSE 100 just nine points up.

A more revealing story is seen in the FTSE's P/E, with the market's rating increased to 13.7 from its level of 12.1 at the end of December. With the price component of the ratio remaining static, the rise points to concerns over future earnings growth.

How well-founded are such worries? We'll have to wait and see. One thing, though, is clear: despite the fact that around two-thirds of the FTSE 100's earnings come from overseas, a moribund UK GDP growth rate won't help.

The UK stock marketQ1 2011Q4 2010
FTSE 1005,9095,900
FTSE 100 yield3.1%3.0%
FTSE 100 P/E13.712.1
FTSE All Share3,0683,063
FTSE All Share yield3.0%2.9%
FTSE All Share P/E14.212.9

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AlysonThomson 27 Apr 2011 , 1:59pm

I was looking in an Edinburgh Estate Agents window yesterday and I can't believe how far property prices have fallen up here, even for stone built which always had a premium price!

Thangbrand 27 Apr 2011 , 6:20pm

The trigger points for the Governor to write to the Chancellor about inflation are 1% and 3% - i.e. 1% either side of the 2% target.

BarrenFluffit 27 Apr 2011 , 6:40pm

Interesting that households are saving more whilst the returns on savings are at a very low point. What are they saving for?

bendy60 27 Apr 2011 , 8:07pm

Perhaps this reflects the reduction in household debt - people just getting out of trouble


MDW1954 27 Apr 2011 , 10:07pm

Thanks, Thangbrand.

Sloppy wording on my part. Apologies.

Malcolm (author)

notbobby 28 Apr 2011 , 9:06am

Maybe I need a maths lesson. Does a -0.5% then a +0.5% actually take us back to square one? In my mind it does not...

100 - 0.5% = 99.5
99.5 + 0.5% = 99.975

Am I being too picky? Maybe in this case it's close enough to call being back to 6 months ago levels but I always feel that when it's reported less thoughtful people will presume -x% +x = 0% but it does not.

MDW1954 28 Apr 2011 , 10:11am

Hi there smu98ls,

The full calculation is:

((100*0.995)*1.005) = 99.9975

so you're a "9" adrift, but otherwise correct.

But the "back to where we were" statement comes from the ONS, who said we were back to Q3 GDP levels.

In any case, as I think you agree, given the inherent rounding errors of the estimates involved (not to mention subsequent revisions), I don't think the difference is material!

Malcolm (author)

Snorvey 28 Apr 2011 , 10:28am

Why don't you compare it with the same period last year? Isn't that more valid?

Gengulphus 28 Apr 2011 , 10:37am


In the abstract world of mathematics in which every number is known with absolute precision, you're right apart from what I suspect is a typo: 99.5% increased by 0.5% is 99.9975%, not 99.975%. So ten times closer to exact break-even than the figure you gave, but still not exact.

In the real world where a percentage quoted to one decimal place is the result of rounding some other more precise figure, the outcome of a quoted fall of 0.5% followed by a quoted rise of 0.5% could be anything strictly between:

* an actual fall of 0.45% followed by an actual rise of 0.55%, which works out as a rise of 0.097525%, and:

* an actual fall of 0.55% followed by an actual rise of 0.45%, which works out as a fall of 0.102475%.

That range from -0.102475% to +0.097525% isn't precisely centred around 0.0%, but it's very close, and in particular the difference between the centre of the range and 0.0% is much smaller than the length of the range... I.e. the outcome is basically break-even as closely as can be determined within the accuracy of the data being used. But using that sort of mouthful rather than just "break-even" is likely to be regarded as over-pedantic and unreadable by the vast majority of the article's intended audience!

That sort of difference between abstract, absolutely precise mathematics and real-world, limited-precision mathematics does come up quite often. One example is percentages that don't add up to 100%, such as three items each making up 33.3% of a total. The mathematical sum is 99.9%, which might lead one to ask what has happened to the missing 0.1%. However the sum taking account of the limited precision of the data could be anywhere from 3*33.25% = 99.75% to 3*33.35% = 100.05%; since 100% is in that range, there is no reason to believe there has to be an error.

Another example is the difference between 0.5 and 0.50. Mathematically, they're the same number; in real-world data, the latter implicitly claims ten times greater precision than the former, unless overridden with an explicit precision claim (e.g. 0.50 +/- 0.03).


notbobby 28 Apr 2011 , 10:49am

Oh yeah. That comes from using the Windows calculator with a mouse.

All the other good point are what I meant by "Maybe in this case it's close enough to call being back to 6 months ago levels". I guess I should just trust that reporter would not declare it the same if the % changes were bigger and rounding errors either way would still result in a less than return to previous levels of whatever it is they are reporting. It's them implying slightly wrong logic I don't like. In this case it does not matter but I'd much prefer accuracy of language. They should say something "in effect that's a return to...".

notbobby 28 Apr 2011 , 10:54am

just a typo not a calc "clicko". Couldn't be a missed click.

notbobby 28 Apr 2011 , 10:56am

By the way I'm talking about all news channels and all websites here not this one in particular. Global moan. It's something that bothered me way before reading this.

mackeson29 28 Apr 2011 , 11:19am

Are we really surprised at the figures ? We were told it was going to be a long haul out of this.

supasap 28 Apr 2011 , 2:23pm

is it the end of a supercycle, is this Japanese style gloom for ages..... when do I turn everything to cash?

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