OECD is now forecasting that the UK economy will enter a recession (story from Telegraph).
From a macro perspective I guess it is not counter-intuitive that growth comes to a halt when the world is engaged in a massive deleveraging operation; and at the same time impacted by the increasing uncertainty caused by the public finances in the Euro Zone.
But reading the forecast from the OECD I couldn’t help think back on the previous posts on this blog about how the change in online sentiment for some time as indicated that a recession was becoming more likely.
The 2nd of August I wrote a this post that showed that those with more influence in the debate on the UK economy was becoming more concerned about a possible recession than the public in general.
Since our influence-weighted analyses usually serves as leading indicators, this was a clear warning sign.
On the 1st of November I wrote this post in which I point out that the Onalytica Recession-Index for the UK economy had reached an all-time high (since April 2010).
In October 2011 the equal-weighted Recession-Index, which represents the sentiment of the board population, actually overtook the influence-weighted, which represents the sentiment of those with more influence in the debate on the UK Economy. The gap has widened in November.
This effectively means that the broad population as a whole are now more convinced that we are heading for a recession and are likely to reign in their spending further.
The state and trends of the sentiment in the economic debate can be highlighted using Onalytica Indexes.
Onalytica Indexes is a collection of indexes which tracks how online media report on a range of economic and business issues.
Over the years an increasing amount of research has been done into how media reporting can be used as indicators for the state of the economy. Other research has highlighted that the way economic news is reported can explain why consumer sentiment sometimes departs from economic fundamentals.
Onalytica Indexes shares the same basic ideas as these examples; that the level and change in the attention an issue receives in the public debate can increasingly be transformed into an indicator of economic trends.
In practice this is done by continuously collecting a large sample of what is published online about, in this case, the Eurozone economy. The Inflation-Index then measures the amount of articles that make references to what can be interpreted as inflationary issues. This includes the word “inflation” itself, references to increasing prices, that goods and services are becoming more expensive, and so on.
Figure 1 (below) shows the Onalytica Recession-Index for the UK Economy. Notice the sharp and accelerating increase since the low-point in July 2011.
The Recession-Index shown in Figure 1 uses equal weight for all voices. This weighting usually makes the results correlate well with what a popular poll would show.
The interpretation of the graph is thus that the population in general thinks that there is a higher chance of a recession in the UK Economy than they have thought at any time since April 2010.
Figure 2 (below) also shows the Recession- Index, but here all voices are weighted according to their calculated influence on the topic “UK Economy”. This means that national media, influential economists and similar are weighted more than, say a personal blog.
One way of interpreting Figure 2 is that among this group of stakeholders there has also been an increasing expectation (or fear) of a recession in the UK Economy since June, but the increase seems less dramatic.
Comparing Figure 1 and Figure 2 it is clear that “the average person” regards the chance of a recession as higher; both groups regard the chances as dramatically increased since July of 2011.
Clearly, if the government was hoping that consumers were going to feel more optimistic and start spending more, the data seems to be disappointing.
Another example of how the economic sentiment can be better understood using this type of analysis is shown in Figure 3.
Figure 3 (below) shows the Onalytica Crisis-Index for the Euro Zone since April 2010. Clearly the view that a crisis is becoming more likely has been increasing since late April 2011 and although it seems to have dropped slightly in the last three weeks it will be very interesting to follow this index going forward.
A final example shows how combining indices can be very powerful.
Figure 4 (below) shows the Onalytica Recession-Index and Onalytica Inflation-Index for the US Economy since April 2010.
The Recession-Index is used as an indicator of the collective sentiment and indicates that the economy is likely to decline.
As Inflation is a key focus of a growing economy an increase in the Inflation-Index can be interpreted as an expectation of economic growth.
The idea is not that these Indexes should necessarily predict the underlying economic data, but show how the public in general (the equal weighted version) and those with more influence (the influence weighted version) perceive the economy.
I haven’t tested the indexes in Figure 4 against actual GDP or Inflation figures so I can’t comment on those correlations. I have tested them against the S&P500 Index and that looks impressive.
The UK Budget 2011 is announced today and has been driving a significant amount of the current politics debate.
Spending cuts are a key concern for many, but some publications are taking a different slant. There is an interesting article in this week’s edition of The Economist about the ‘Big Society’. Please click on the following link for the online PDF version of the edition, see pages 18 and 19 for the article referenced in this post: www.economist.com. The article summarises some of the political history leading up to the current day, discusses recent political actions and spells out some of the ideals of the coalition Government. Summing up the main strategy of the Big Society: “It brings together three things: pluralism, localism and voluntarism”.
The Big Society: How will we get there?
The article outlines some of the fundamental steps that will be taken in order to achieve the Big Society and predicts some of the potential outcomes and consequences of these. Common misconceptions of the knock-on effects include the extent of reductions to the civil service: “Pluralism could lead to a much smaller civil service than anyone thinks. ‘Once you start letting people compete, it is incredible how few people you need in the centre,’ says one of Britain’s most senior mandarins. And, since the change is technocratic not political (the state, after all, is still paying), it will be difficult for a future Labour Government to reverse”.
The strategy also entails a certain amount of decentralisation of power to local government, but The Economist highlights that: “This localism is somewhat marred by the Tories’ deep distrust of local government”.
Learning to trust is not the only problem facing the coalition Government in the journey to the Big Society. Pushing the concept of volunteerism is also likely to present its own obstacles. The article points out that even some of David Cameron’s peers have their doubts: “Volunteerism […] is a big idea. The people around Mr Cameron argue that just reducing the supply of government won’t wean people off the state; you also have to reduce the demand for it […] In practice, however, the idea has flaws […] most people lack the time and expertise required, and there is not a lot of money around to help them (thanks to the spending cuts).”
A poignant example highlights a sizeable portion of the problem: “Britons seem to band together of their own accord only when they want to oppose something – such as the Government’s plans to sell off the nation’s forests, which they halted”.
Where is the money coming from and where is it going?
The Economist visually splits out Britain’s spending and receipts in the UK Budget 2010:
Source: www.economist.com page 19
How is it really going to work?
With a number of hurdles to surmount, the article underlines the key determining factor: Implementation, pointing out that the method is crucial: “Unless reform of the state is seen to be equitable and effective, citizens will not accept it”.
The analysis doesn’t stop there, but draws attention to two further issues: the Government’s breadth of ambition (“set against that of Mrs Thatcher, who did far less in her first year”) and that “most other rich-world governments will have to do the something similar soon. That is partly because of their fiscal situation: even America will have to start reconciling its revenues and its spending in the near future”.
“Mr Cameron, for all his haste, is at the front of a great wave” – we’ll be keeping our eyes open for the emergence of the next Big Society.
Read the full article here:
www.economist.com - See pages 18 and 19 of the PDF version of the edition.
Will McInnes has another interesting
post today (“Don’t mention the economy”). It got me thinking about how careful many are “not talking the economy into a recession”.
Using
InfluenceMonitor I had a look at the debate surrounding the UK economy.
Figure 1 (below) shows how frequent a number of issues appear in the debate on the UK Economy. (Normally referred to as the ‘Share-of-Buzz’).
Notice the increased focus on the “recession” from October to January, followed by a very small drop.
At the same time, the focus on “slowdown” is mostly constant.
Because the Share-of-Buzz is unadjusted for influence (all voices count the same) the picture closely mirrors the debate among ‘the general public’.
Now, notice Figure 2 (below). It shows the Share-of-Influence of the same issues. Because this metric is adjusted for influence it a closer depiction of the debate among the top influencers including the influential media.
Notice how the decline in the debate on “Recession” is followed by a corresponding increase in the use of “Slowdown”.
It’s almost like some omnipresent voice said “Don’t mention the ‘R-word’ – the safer word is ‘slowdown’”.
I am sceptical to what extent you can avoid a recession by not talking about it. You may be able to postpone it a short while, but if your economy is not sustainable, you will be hit sooner or later. The market forces will (thankfully) always catch up.
It may be telling that the “optimism” element has all but disappeared from the influence adjusted debate on the UK Economy.