Has Austerity Brought a Boom in the UK?

In “UK: Economic growth, double-dips and the PMI,” (G. Buckley, Deutsche Bank, Nov. 4, 2011, not online):

UK GDP grew by 0.5% qoq in Q3, but the position the economy is in is now officially worse than it was in the aftermath of the Great Depression. Add to this the weakening in the composite PMI survey for October (particularly the manufacturing report), also published this week, and escalating risks for a sharper euro area recession, and the stage possibly looks set for a much bleaker picture by the end of this year/start of 2012.

With regards the UK PMI, if the composite index remains at its October level of just above 50 during the remainder of the fourth quarter then that would be consistent with only very modest GDP growth of around 0.1% qoq. However, the risks seem tilted to the downside with our forecast for a technical recession in Europe highlighting the possibility that we see the same in the UK.

Here is the key graph:

Figure from G. Buckley, “UK: Economic growth, double-dips and the PMI,” Global Economic Perspectives, Deutsche Bank, Nov. 4, 2011.This account reminded me about the heated debate over the strength of the empirical results about expansionary fiscal contractions — especially assertions (such as by the JEC-Republicans — the document is mysteriously no longer online, but I have saved this gem and posted it here) that the resulting expansion would follow on quickly after the fiscal retrenchment. Over the past few days, I’ve had several discussions about where the debate now stands. I think if we don’t see the phenomenon of a quick expansion in response to austerity in a relatively open, highly indebted economy like the UK, we are unlikely to see such an effect in the United States.

For a discussion of the problems of the empirical implementation in Alesina and Ardagna (2010), the paper cited by the JEC-Republicans, see this post, as well as the September 2010 IMF WEO Chapter 3.

This post originally appeared at Econbrowser and is reproduced with permission.