UK Austerity Might Have Had Adverse Effects

The Independent Office for Budget Responsibility issued a report that sheds some light on the effects of austerity on British economic growth.

The forecast from the OBR highlights the weak growth that was not helped by the imposing of austerity measures.

To understand why the economy has grown less strongly that we expected in June 2010, it is helpful to look at each category of spending in the economy separately. Consumer spending, investment and net trade have all contributed roughly equally to the unexpected weakness of growth since the beginning of 2010:

  • consumer spending has contributed less to GDP than we expected primarily because higher prices for oil, energy and food have reduced the volume of goods people could buy for a given amount of cash. The cash value of consumer spending was broadly in line with our expectations;
  • business investment growth has been much weaker than we expected, although the quarterly figures are volatile and heavily revised. Constrained credit conditions are likely to have hampered investment by smaller firms, but larger firms are more likely to have been deterred by pessimism and uncertainty over future domestic and foreign demand;
  • an improvement in the net trade position contributed much as we expected to GDP growth between early 2010 and the end of 2011, helped by the outperformance of UK export markets. But there has been a sharp deterioration so far this year, reversing much of this contribution; and
  • in contrast, cuts in government spending on goods and services have directly reduced GDP by less than half the amount that we expected in June 2010. This reflects the fact that the cuts have affected the direct measures of government output used in the National Accounts by less than we had assumed.

You can download the report directly in the OBR website

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza