The coalition is not uniquely wrong on economic policy, and that’s even worse…
Politicians often bandy around international comparisons to demonstrate that the policies they are advocating have global support while their opponents are internationally isolated. Two comments spring to mind when reviewing the OECD’s latest growth estimates: first, if you are wrong, the fact that other people are wrong too may be some comfort, but it doesn’t mean you’re right; and second, when it comes to the international economy, when everyone is heading in the same direction, it almost always ends badly. What seems to be happening at the moment is a pretty much textbook case of a downward spiral in global demand and global growth, and that’s not good news even if it means the UK coalition government is in plenty of company.
The details: OECD GDP growth slowed to 0.2% in the second quarter of 2011 from 0.3% in the first quarter, according to figures published on 22 August 2011. The slowdown is particularly sharp in Germany, France, Canada and the UK, with Japan still growing least fast of all the G7 developed economies (largely because of the tsunami, which is at least a more credible excuse than everyone having an extra day off for the Royal Wedding!) The UK was second from bottom on annual growth over the last four quarters at 0.7%. Germany’s was the highest at 2.7%, although their growth rate in the most recent quarter (0.1%) was worse than the UK’s (0.2%). GDP across the 34 OECD nations dropped to 0.2% in the first quarter of 2011, down from 0.3% growth in the first quarter of 2011. So growth has now weakened for four quarters in a row, making the latest figures the weakest for two years.
The reason that all the developed nations are seeing slower growth is partly because they are all following the same economic policy of cutting deficits and spending: and they are prescribing even more stringent cuts for countries with the worst deficits and the greatest need for growth. The TUC believes that is the wrong approach for any one country because the best way to avoid spiralling deficits is to promote growth, and deep cuts in public expenditure when the economy is weak just depresses domestic demand. But if every developed country cuts back at the same time (funnily enough, pretty much exactly what happened in the Great Depression of the 1930s), there isn’t even the possibility of external demand digging a nation’s economy out of the hole. George Osborne is now placing his faith on growing exports to developing nations like China, which also needs to stimulate its own domestic demand. But the even worse news is what Harvard University’s Dani Rodrik has to say in the Financial Times (£) today: China is not the magic wand the Chancellor is depending on.
John Evans, who heads up the Trade Union Advisory Committee (TUAC) to the OECD said:
“These figures show that austerity policies have brought about a collapse in growth that has itself contributed to the financial market panic this summer. Governments need to return to measures to stimulate the global economy in the short term so as to contribute to job creation and ultimately to fiscal consolidation in the medium term.”
Which is also what, in rather less clear language, is what IMF Director Christine Lagarde was saying only last week.