The Soft Bigotry of Low Growth Expectations
The British Chambers of Commerce released their latest forecasts for the UK economy today.
Their survey found that:
While the results are more encouraging than the previous quarter, they show that growth is still too weak, with the balances still below those seen in 2007 before the recession. Many manufacturing balances are now at a satisfactory level, but the service sector balances are sluggish.
Balances measuring domestic and export activity across firms showed welcome increases, and more businesses are looking to invest in employing more staff, training, and plant and machinery. However, cashflow is still a real problem, and despite concerns about inflation decreasing, recent increases in oil and food prices may alter this over the next few months.
As a result they are estimating that growth in 2012 as a whole will be just 0.6%. Let’s be clear – that is a disastrous forecast, growth even weaker than in 2011.
But a quick glance at the headlines tells a different story.
Instead of looking at the whole year figures, most of the coverage so far has focussed on their prediction of 0.3% growth in Q1 – i.e. the UK avoiding a ‘double dip recession’. The BBC points out the signs of improvement, ‘Businesses up beat on economic prospects’ says the FT whilst ‘Dip Dip Hurray as recessions fears eased’ says the Sun.
This time last year the OBR expected growth in 2012 to be 2.5%, which in itself was down from 2.8% at the time of Osborne’s first budget.
We find ourselves in a ludicrous situation whereby the success or failure of the government’s economic policy is being measured, by many, almost entirely in terms of whether we have two back-to-back quarters of negative growth or not.
The BCC releases a quite gloomy forecast and many are prepared to call it ‘good news’.
I’ve pointed out before that even if the economy grew by 1.5% in 2012 – twice as much as the OBR have predicted – this would still be a bad result. But expectations are so diminished that the Government might get away with hailing this as a success.
Paul Krugman, borrowing a term from President Bush, has called this (in a slightly different context) the ‘Soft Bigotry of Low Employment Expectations’. I now seriously worry that the UK is suffering from an acute case of the soft bigotry of low growth expectations.
Last week in the FT Chris Giles wrote that the ‘UK could face more than seven lean years’. He notes that:
In 2011 the economy expanded by only 0.6 per cent, excluding the effects of North Sea oil, while the OBR’s estimate of spare capacity in the economy shrank by 0.7 per cent. Without saying so, it has judged that Britain’s potential output fell in 2011.
He continues to argue that this supply side problem may be deeply rooted and persistent well beyond 2013/14 in which case ‘Britain’s glory days are not about to return’.
I disagree on the causes of weak growth in 2011, I think the OBR has not adequately taken into account the impact of austerity (something show by Adam Posen last week*) and I worry
that the UK is misdiagnosing a serious demand problem as a productivity problem.
But on some level this actually makes me angry. Angry that many people seem to have accepted very low growth as either somehow ‘inevitable’ or, even worse, as somehow a ‘good result’. Low growth is not inevitable nor is an achievement.
*The key point in the UK versus US recoveries in 2010 & 2011 is sometimes obscured by an excessive focus on government spending and people arguing the US also had lots of austerity in 2011. The UK fiscal consolidation in 2011 was mainly through a VAT hike & a NICS increase on employees – i.e. it reduced household income and showed up in GDP as weaker consumption. The US stimulus of 2011 was focussed on a payroll tax cut that also showed up in consumption rather than government spending on a GDP basis. You can’t measure the stance of fiscal policy by simply looking at government spending numbers.