From the TUC

This is a home grown growth crisis

19 Oct 2011, by in Economics

Today’s FT front page story reports that Mervyn King is admitting that both the recovery and the public finances are off track. So far so good, it’s welcome to see a senior policymaker admitting this and the fact that King is saying this comes as no surprise given the Bank’s decision to resume quantitative easing – a clear sign that it does not think things are going well.

However King goes on to blame to the crisis in the Eurozone for the economy’s current problems:

“We were on track,” Sir Mervyn told a business audience in Liverpool, “but the problems in the euro area and the marked slowing in the world economy have lengthened the period over which a return to normality is likely”.

I’m not so sure about this. It is already fairly clear that this is also George Osborne’s line – ‘things were going fine but now there’s a problem in the Eurozone which is impacting us’. I  don’t doubt for a moment that the major crisis in Europe is impacting on UK business confidence, hitting our exporters and has the potential to be a major blow to the financial system.

But the economy hasn’t grown for nine months. Our problems clearly predate the intensification of the Eurocrisis.

The Treasury’s latest round up of independent forecasts for the UK was published this morning – the consensus estimate for 2011 growth has fallen again, to just 1.0%. This is part of a clear trend as the chart below demonstrates:

This chart shows the average growth forecast of a wide range of forecasters for 2011 at various points in time. As is clear it has been falling since January 2011.

What is even more useful is to look at the reasons why this estimate is falling. Comparing the January forecasts to the latest ones reveals some interesting details. Back in January the economy was expected to grow by 2.0% against 1.0% now. But the composition of that growth was very different.

In January independent economists expected domestic demand (government spending, consumer spending and business investment) to add 1.4% to growth and net trade (exports minus imports) to add 0.5% (the numbers don’t always sum exactly due to rounding).

Now economists expect domestic demand to subtract 0.4% from the economy as consumers, business and government all cut back whilst they expect net trade to add 1.3%, much more than previously.

In other words, in the last ten months, economists have come to believe that our exports will do better than they originally thought but have become more and more pessimistic about the domestic situation.

The recovery is certainly off track but this is a home grown crisis. Yes the Eurozone has the potential to make things much worse but the government can’t use it as an excuse for our current problems.  

10 Responses to This is a home grown growth crisis

  1. Oxford Kevin
    Oct 19th 2011, 10:29 am

    I am not sure how we can be saying that it is the eurozone which is pulling the UK economy down when the eurozone economies have been outperforming the UK economy. Shouldn’t the reality actually be the other way round.

    http://ablog.typepad.com/keytrendsinglobalisation/2011/10/uk_worse_than_eurozone.html

  2. Stephen
    Oct 19th 2011, 1:52 pm

    Yeah. I’m pretty sure you can restate this as the fact that the growth of exports (mostly to EU) has been – and still even now is – bang on target to the OBR forecasts.

    Its everything else they got wrong.

  3. sophie
    Oct 19th 2011, 3:20 pm

    Very interesting. But surely in large part the economic situation is home-grown in the sense that a slow/halting recovery is as much as we can hope for after a credit-fuelled boom and balance sheet recession, compared to the bounce-back usually seen after a demand-side shock. Difficult to blame spending cuts as these are backloaded – there were no big cuts 9months ago, especially relative to what Labour would have done (although there were never any details about exactly labour were going to cut…) You will also recall that Darling/Brown used exactly the same argument – it’s a global phenomenon, not of our making – at the height of the crisis to explain the dire economic situation.

  4. Oxford Kevin
    Oct 19th 2011, 4:59 pm

    The OBR forecase at budget time wasn’t very optimistic in the first place, already reflecting the points that you raised sophie. Even though the worst of the cuts haven’t yet been hit, the response to the GMB FoI requests to government departments and councils all around the land in September last year showed that over 150,000 jobs were already in the process of being cut.

    http://www.guardian.co.uk/commentisfree/2011/oct/10/public-sector-workers-plan-c
    http://www.guardian.co.uk/uk/feedarticle/9261647

    I didn’t accept Brown’s/Darling’s excuse at the time they made it, in exactly the same way I don’t accept Osborne’s now.

  5. jonathan
    Oct 19th 2011, 5:09 pm

    I find a disconnect in those who speak in the language of expectations. The argument is made, for example, that showing credibility increases confidence and that means more investment, more jobs, etc. In the next breath, the argument is that cuts haven’t really taken hold yet. Problem is this: if expectations are meaningful, they are meaningful not only in the ways you want but in the ways you don’t want. You can’t pick. When you look at what’s coming, why would you consume? why would you invest when you can see the truck lights coming?

  6. Coastliner
    Oct 21st 2011, 8:52 am

    One of the reasons for the poor financial situation is that property prices continue to be held ridiculously and artificially high. Until a correction takes place, with property finding its correct level after the ludicrous ‘boom’ years, the misery will go on and on. Meanwhile, old Penfold from the BOE continues to collude with Gideon to inflate government debt away thereby robbing savers and the prudent quite blatantly. Whilst they continue on this track the feckless borrowers get subsidised by those who live within their means. You couldn’t make it up – Penfold & Gideon are just downright robbing b*stards. A housing crash needs to be allowed to happen and then rebuild from there. The sooner this happens the better for all of us who are betrayed on a daily basis by seeing our money devalued.

  7. Britain’s misery at a 19 year high, St Paul’s under occupation and a familiar Tory squabble about Europe: round up of political blogs for 15 – 21 October | British Politics and Policy at LSE
    Oct 22nd 2011, 11:02 am

    [...] The Staggers documents how Osborne’s spending review has left Britain a poorer country in virtually every way, as Duncan Weldon argues that we are experiencing a home-grown growth crisis. [...]

  8. What impacts are spending cuts having for growth? | ToUChstone blog: A public policy blog from the TUC
    Oct 25th 2011, 5:24 pm

    [...] stagnation is raging. While the Government maintains that the Eurozone is to blame the evidence is fairly convincing that our problems significantly pre-date its difficulties.  But the argument doesn’t stop [...]

  9. UK Consumption: One picture is worth one thousand words | ToUChstone blog: A public policy blog from the TUC
    Nov 14th 2011, 1:43 pm

    [...] I’ve noted previously that it is very hard indeed to blame the UK’s slowdown over the pa… – our export performance has actually been pretty reasonable, what we’ve seen is a collapse in domestic demand as household income is squeezed and austerity begins to bite. [...]

  10. Richard
    Nov 14th 2011, 8:33 pm

    “although there were never any details about exactly labour were going to cut”

    And neither did the Tories or Lib Dems pprovide. Nothing about scrapping BSF, schools sports funding, closing 124 Sure Start centres and counting, removing child benefit for earners on over 40k, closure of homeless and battered wives shelters and so on and so on adnauseaum.

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