Data conflicts dog economic policy debate

LONDON, July 24 (UPI) -- An unexpectedly steep fall in Britain's gross domestic product and a pickup in German business confidence: These contrasting end-of-week headlines for Europe's two largest economies highlight the head-scratching problems faced by government and independent forecasters in assessing the real state of Europe's economy in mid-2009.

Hopes that European governments would be able to combine -- as their central banks have done to a limited degree -- in implementing coordinated and synchronized fiscal measures have long been dashed. The European Union may be a common market with a common currency and a single central bank, but EU members have governments that insist on acting independently.

Political leaders in Europe have separate and different electorates to whose fears and hopes they need to respond. And they face widely varying domestic political and financial circumstances that both drive and constrain their political responses. Even before the crisis hit, Britain's budget deficit was growing while Germany was on a path to bring its public sector spending back into line with revenues.

In Britain, official figures released Friday show a fall in second-quarter GDP of 0.8 percent. That is equivalent to an annualized rate of decline -- the measure widely used in the United States -- of more than 3.2 percent. The figures, while provisional, are far worse than generally predicted by bank and other independent analysts and lie close to the pessimistic end of the range of published forecasts. And they follow a first-quarter contraction of 2.4 percent.

The British government of Gordon Brown, which is under fierce political and media scrutiny for "spinning" news, has stopped all talk of seeing "green shoots of recovery." But its first public response to the latest figures was still relatively upbeat with the Chief Secretary to the Treasury Liam Byrne -- in effect the deputy finance minister -- saying he was "cautious but confident" that growth was going to return at the end of the year.

Even if Byrne is right about recovery beginning at the end of 2009, that would be too late to meet official targets. It would take an improbable and sharp turnaround starting now -- with growth of more than 1.5 percent in each of the third and fourth quarters of this year -- to hit the official Treasury forecast of a decline of 3.5 percent in 2009 over 2008. GDP in the first half of the year is already 5.6 percent down from a year before.

Goldman Sachs Global Economics Research suggests that the U.K. figures of a first estimate of second-quarter GDP might prove overly pessimistic based on the pattern of official revisions for the years 1999 to 2006. But other analysts note that this research covers revisions during a period of economic growth rather than contraction. Where official data previously underestimated growth, it could now be underestimating the rate of decline.

Politically, in devising a response, Britain's Labor government is boxed in. The public debate in the United Kingdom has started to swing to long-term fears about how long deficit spending can be sustained. Polls show a massive drop in support, with the party lagging the Conservative opposition by close to 20 percentage points. An election due at latest in June 2010 is already overshadowing the debate on responding to the recession. Brown has been forced to moderate his attacks on "planned Tory spending cuts" if they win power by acknowledging that a future Labor government, too, would have to limit public outlays to curb a soaring financial deficit.

By contrast, the German government was cheered today by publication of a surprisingly positive index of business confidence by the Ifo Institute. Its business climate index rose in July more sharply than expected with the 7,000 companies polled reporting an improvement both in their current business position and in their outlook. German industry, says Ifo, is getting back on its feet, and has passed the recessionary trough.

Evaluating the data, German bank economists see the latest survey as an important signal that economic activity is about to pick up again. Even so, unemployment is seen continuing to rise well into next year, putting a renewed dampener on the willingness of consumers to spend.

Despite the better mood, Ifo sees no reason to change its forecast for a dire economic contraction of more than 6 percent with a further small drop in 2010.