The chart below shows the level of quarterly GDP over the past five years and tells us a great deal indeed.
I blogged this morning on the weakness of the argument that ‘the economy is healing’, it has since occurred to me that there is a much easier to make the same point.
The case that we are now experiencing a recovery relies upon looking at the upgrades to GDP forecasts but, as I noted this morning, real wages are still falling.
Taking stock of current forecasts, when exactly can we call a recovery in the UK?
The Chancellor has long been keen to tell us that “the economy is healing” and, according to the latest Bank of England forecasts, he might finally have some justification in saying this. At his press conference last week the Sir Mervyn King was able to revise up growth forecasts for the first time since the financial crisis hit.
The Bank now expects growth in 2013 to come in around the 1.2% mark, an upward revision from the 1.0% it expected in February and twice as high as the OBR’s own estimate of 0.6%.
Presented with this information, one response is to hail ‘Good news Britain’ and point out that the Bank now expects a recovery twice as fast as the OBR. Another and I would argue more correct response, is to note that whilst growth of 1.2% is obviously preferable to growth of 0.6% it is nothing to shout about.
Figures from the ONS today show that between 2005 and 2011, UK disposable income per head dropped from being the 5th highest in the developed world to 12th.
Such figures are part of a larger picture emerging about the recent performance of the UK. In broad strokes the big picture of the UK since 2008 has been of a large fall in output, followed by a long period of stagnation that may finally be giving way to an incredibly weak recovery. We are, by most measures, underperforming both out own historical experience and the experience of other large developed economies.
The past two weeks have provided some good and some bad news on the UK economy. On the one hand GDP data for Q1 2013 was better than expected, whilst on the other GDP per capita figures suggested that the hole we are currently in is much bigger than previously thought.
GDP per capita measures economic output per person. In many ways this is the most sensible way to measure growth over the medium term and the best way to compare growth across nations.
As can be seen in the table below the UK’s performance is abysmal.
It is fairly well known that UK GDP is still around 2.6% below its pre-recession peak of Q1 2008 – an unprecedentedly weak recovery. But even that grim statistic underplays how poor our economic performance has been as it does not take account of population growth. The chart below shows real GDP per capita (or national income per person) since Q1 2008.
Yesterday the Chancellor wrote to the Governor of the Bank of England confirming the remit of the Financial Policy Committee (the BOE’s ‘macroprudential policy setting committee’.
Whilst this may sound like a fairly tedious and mundane matter, it was in reality anything but. As Dan Davies put it on twitter, the tone was about as close to “did you spill my pint” as Bank/Treasury communications ever comes.
Reading between the lines the Treasury seems concerned about the consistency of the FPC’s message (the Treasury is keen for the FOC to have “clear, focussed and consistent messages”) and frustrated by the FPC’s interaction with EU regulations (the FPC should “consider how best o meet these legislative requirements and cooperate effectively with the relevant EU institutions and agencies”).
But the big message from the letter is on growth. The Chancellor writes that:
It is particularly important, at this stage of the cycle, that the Committee takes into account, and gives due weight to, the impacts of its actions on the near-term economic recovery.
Or, in plainer English – “It’s obviously important to ensure financial stability but right now boosting growth is more important than safer banks”.
The letter highlights the Treasury’s concern that the Bank may set such tough capital and liquidity requirements for banks and other financial institutions that the flow of credit to business and households is impaired.
This little battle was been brewing for a while, as I wrote after the Bank’s latest Financial Stability Report was published:
The current lending numbers are absolutely awful. Just this week the BBA revealed that the big high street banks still have falling lending to non-financial firms and very weak mortgage lending growth.
But we now know that a key aim of Treasury policy, the flagship policy in last week’s budget, is to boost mortgage lending.
BIS is desperately trying to find ways to expand lending to small business (and Vince Cable today has already said that “The idea that banks should be forced to raise new capital during a period of recession is erroneous”), whilst the Treasury is keen on boosting the growth of housing finance. The OBR’s Robert Chote yesterday argued that “banks are a major constraint on the economy”.
In other words macroeconomic policymakers in the Government – whether from HMT or BIS – all want to see lending increased.
Meanwhile the FPC is saying that banks are not in a position to boost lending without more capital. The FPC is saying this at the very same time that the BOE is jointly running the FLS scheme to try and boost bank lending.
This is a messy situation. Partially it has arisen because the FPC was designed as part of a ‘new economic model’ based on rising business investment, savings and exports. The problem now is that Osborne has abandoned his attempt at rebalancing and is instead focussing on something that looks rather like the ‘old economic model’.
But the real issue is that the Chancellor has given the Bank a series of herculean tasks. He wants growth boosted but he is not prepared to use fiscal policy to do this, so the Bank is finding itself set with a whole series of targets – meet the inflation target, ensure banks are safer and also do all that is necessary to boost growth. It is unclear to me whether the Bank can achieve this.
If nothing else this week’s spat reinforces my own believe that the most effective way to support the ‘near-term economic recovery’ is through fiscal policy.
Yesterday I blogged about my frustration with ‘economic fatalism’ and argued that with better policies – not just a boost to demand but also wide spread reform of how our economy works – we could achieve better outcomes.
Today the Guardian has published a classic example of the ‘economic fatalism’ genre from HSBC’s Stephen King.
King argues that he is offering an “alternative explanation, neither Keynesian nor austerian” for our current economic woes. That said in practice he endorses fiscal austerity, he just doesn’t think it will boost growth. Instead he argues that:
The new reality is, I’m afraid, a world of significantly lower growth, where the gap between our expectations and actual income is getting bigger day by day. Neither Keynesians nor austerians have an answer to this sober outlook because both sides claim their own policies will ultimately take us back to a world of rapidly advancing living standards.
Praying for a strong recovery is not, however, the answer to our problems. By doing so, we’ll only end up imposing a bigger and bigger cost on our children. Living within our means is hardly easy but the alternative is worse: false hope leads ultimately to financial crisis, political upheaval and social turmoil.
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.
Today’s GDP figures were certainly better than expected, with growth of +0.3% topping the estimates of most economists. But noting that something was better than expected does not mean it qualifies as ‘good news’.
The fact that avoiding an unprecedented ‘triple dip’ is celebrated as a sign of success suggests that expectations really are on the floor. This is like coming last in a race and announcing ‘well, at least I didn’t fall over and break my leg’.
Growth of +0.3% takes the economy back to where it was 6 months ago, before the fall in Q4 2012. We have had no growth in the past 6 months, only 0.4% growth in the past 18 months and just 1.8% in the 11 quarters since George Osborne’s first Budget.