GDP growth gaps
I’d like to follow up my post this morning with another about low growth (as opposed to actual recession.) One problem with all the emphasis on recession is it encourages the belief that the flatlining we’ve had for the last year and a half is okay, really. And if the revision of the GDP figures next month reveals that the economy actually grew slightly (a strong possibility) some people will conclude that there isn’t a problem after all.
This morning I mentioned the need for the economy to grow at about 0.8 per cent a year to keep up with population growth, otherwise per capita GDP will fall. The other issue is that we’re used to a certain rate of growth to pay for a gradually rising standard of living and to maintain employment. In the twenty years before the recession growth averaged slightly over half a per cent per quarter – even if we always avoided negative growth, sustained growth below this level will feel pretty cruddy. This afternoon’s chart tries to measure these gaps: imagine that the economy had continued to grow at 0.2 per cent a quarter, enough to maintain per capita GDP; the blue line measures how far short of that we’ve actually been. Imagine that the economy had grown at 0.5 per cent per quarter, the red dotted line measures how far short of that we’ve actually been.
The lower the line the worse our position. There’s nothing particularly original about this, its simply an attempt to show that just avoiding recession isn’t OK. There’s a strong chance next month’s revisions of the GDP figures will show that actually we managed to avoid a double-dip recession. If that happens, the usual suspects in the media will trumpet this as tremendous news for the government and a blow to all their critics.
It won’t be. Low growth may not be as bad as a reduction in GDP but it is still bad news.