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What do the GDP figures mean

On Tuesday the GDP figures for Q4 of 2010 were released and they indicated that the economy had contracted 0.5%. This was a downgrading of the modest prediction of a 0.5% expansion. What does this mean? Well, for starters, the snow accounted for half of that contraction or all of it. Discounting snow, economic growth was somewhere between 0% and -0.25%. Either isn’t very good.

Why was there a contraction instead of growth?

The snow has already been accounted for, the rest can be ascribed to Peak Debt. Peak Debt is a theory, in the process of being proved, whereby consumers (businesses, individuals etc) can only take on board so much debt before it becomes unmanageable and consumption is cut in order to service the debt.

Despite my awful abilities on paint, I hope you can see the bell shape of the diagram. As a country and economy, we have crossed the peak about a year ago. It starts large and trickles down to the individual consumer. Once the individual is affected the shockwaves across the economy are felt. As consumer spending is sharply cut in order to service the debt, the strata above the individual consumer cut spending to service their debt due to the shortfall in revenue and demand. That is an explanation for the contraction.

Q1 of 2011 will contract even further as the shift along the bell curve takes hold. VAT will effect profit margins of businesses, especially those in retail, as they either absorb the increase or increase prices (increasing inflation as well). One could reasonably expect a contraction of 1% in Q1.

Is there anything that can be done?

Yes, quite a lot.  Due to the coalition’s austerity measures Britain can take advantage of one of the lowest interest rates on bonds. This is because there is trust in the economy, how long that will last with negative growth is anyone’s guess. But there is the opportunity, especially at a local level, to increase demand and improve the infrastructure. This will increase growth due to the extra demand in the economy.

Letting inflation run and keeping interest rates low will wipe of debt for the majority. It will, however, eat into the savings of the minority. Inflation will devalue the pound making it cheaper and easier to export but more expensive to import. Inflation isn’t always a bad thing.

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