GDP: Low expectations and the need to aspire to something better
In past six months the economy hasn’t grown at all, in the past eighteen months it has grown just 0.4% and in the past eleven quarters since the Chancellor’s first budget it has managed just 1.8%. We are still 2.6% below the pre-recession peak.
Alongside this truly abysmal growth performance there has been a complete lack of rebalancing. Whilst service sector output is now above its previous peak, industrial production is down 13%, manufacturing output down 10% and construction activity down a huge 18% on where they were 5 years ago.
Meanwhile unemployment has ticked up again, under-employment remains a major problem and real wages have been falling since 2009.
There has been no progress on deficit reduction for a year and there seems unlikely to be any this year either. Deficit reduction, much like the economy as a whole, has stalled.
And yet today’s figures are being celebrated in some quarters as ‘good news’. The bar for success is now so low that simply not experiencing an entirely unprecedented ‘triple dip’ recession is seen as evidence that the Government’s plans are working.
The fact that economy grew by 0.3% in the first quarter does not fundamentally change the economic picture. If this pace were to be maintained for the whole year, then 2013 growth would come in at just 1.2%.
1.2% would be twice as high as the OBR’s current forecast of just 0.6% but would still be a terrible performance. The Government’s fiscal plans were based on an economy that was expected to grow by 2.9% this year. 1.2% growth would be less than half that level.
Whether measured by performance against OBR forecasts, international comparisons or historical experience this has been an incredibly poor ‘recovery’. Indeed for the 2.5 million unemployed people and the millions more who have seen their real wages fall for years it is hard to talk of any sort of ‘recovery’ at all.
Opponents of austerity have never forecast perpetual recession. The argument has always been that growth could have, and should have, been stronger with better policies. Take as an example the year 2011 when growth was just 0.9% – by any reasonable standard that was disastrous year for the British economy, with less aggressive fiscal tightening growth could have been higher and unemployment lower. If the right policies had been pursued in that year, deficit reduction now would be much easier.
I worry that the level of growth we have at the moment is almost the worst of all worlds – not fast enough to make a real difference to most people’s living standards but just ‘good’ enough to allow the government to claim that things are getting better and there is no need to reverse course.
On current OBR forecast the UK is set to experience a ‘lost decade’ and yet because the economy is growing the sense of crisis seems to be fading for many policy-makers. As Paul Krugman has written of Japan we risk stumbling through our own stagnation with an ‘odd combination of smugness and fatalism’.
The ‘smugness’ can be seen today in those hailing the +0.3% as proof the Chancellor was right along whilst the ‘fatalism’ in those who argue that low growth is the ‘new normal’ and there is little policymakers could do to boost it.
This fatalism is both depressing and infuriating. Things do not have to be like this and the measures which have to be taken are reasonably clear.
The single most fundamental problem afflicting the British economy at the moment is a chronic shortage of demand. Fiscal austerity, falling living standards, tight bank lending and the impact of the Eurocrisis are all squeezing demand out of the system.
But it would be a mistake to assume that a lack of demand is the only problem facing the economy, even if it is the most pressing. We cannot simply aim to return to the pre-crisis model of growth which was unbalanced, unstable and in which too many of the rewards from growth flowed to those at the top.
So what should policymakers be doing now? First, stimulate demand through a combination of capital spending and measures which put money in the pockets of those most likely to spend it.
Second though they need what can be thought of as ‘supply side policies’ aimed at securing both rebalancing and a better outcome for those in the middle and below. Serious banking reform, a modern industrial policy, changes to corporate governance, the whole bundle of policies collectively called ‘predistribution’ are all necessary steps.
Finally the UK needs a new fiscal framework that focuses on reducing the debt/GDP ratio in the longer term rather than concentrating on the measurable structural deficit in the short term. This would both take account of the crucial role of growth in ‘dealing with our debts’ and allow the Treasury more room for manoeuvre in the short term.
If we get these policies right than the UK will be well placed to take advantage of the opportunities offered by a growing global economy – with better growth, more sustainable outcomes and higher living standards. Get this wrong and we risk going down the ‘low productivity, low wage’ road with lower living standards, weaker growth and a still unbalanced economy. We can tell ourselves that 0.3% is a good result or we can aspire to something better.