We hear the pundits talking about green shoots, and listen to the commentators pointing to rises in Stock Exchange prices and hope that things are improving … but are they?
We need to understand that there are in fact two economies. A real economy and a speculative economy. It is the speculative economy that is giving evidence of green shoots … only a few months ago we were saying that markets got it all wrong, and already we are saying that they are a good barometer! Mainly it is because we live in hope.
The problem about green shoots is that they can often be the first signs of a parasitic infection in the host plant. Consider Mistletoe, it ultimately either kills the host plant or severely hampers its growth. It is no different with the economy.
Traditionally growth in the economy is measured by an increase in GDP, however, as pointed out in an earlier blog GDP is really the price of our outputs, and if our outputs have not grown and GDP has risen we have entered a period of either inflation or "stagflation".
I also showed that government expenditure can influence GDP without necessarily resulting in increased outputs. In this case we see the proportion of government expenditure as an element of GDP growing.
This is a parasitic development, akin the mistletoe on the tree. In the UK the Government expenditure proportion of GDP has passed the 45% mark and will shortly hit 50%.
Over the short term we can accept an increase in Government expenditure as a proportion of GDP, however, we have over the last 10 years watched it grow from around 37% to 42% before the credit crunch. This has placed a burden on the economy where we have seen this increase funded by taxation increases, many of which are stealth taxes. Slowly making the economy less resilient to the normal ups and downs that a market economy suffers.
We can only talk of green shoots, when we start seeing new business start ups and employment starting to rise … the current shoots have the potential to kill the economy, just as the mistletoe often kills the host tree.
During the late 1960's/1970's recession, in South Africa, we considered that we could gauge the state of the economy by the length of Women's skirts, the shorter the skirts the worse the economy. I still think that they are a fairly good barometer, and right now I see far too much thigh to believe that any green shoots have a hope of surviving through the summer.
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