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.
Economics — Page 2
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.
I enjoyed Duncan’s blog on economic fatalism last week. Interestingly, this came up again, twice, this morning at the Resolution Foundation’s event on ‘2015 – The Living Standards Election’.
First, Stewart Wood of Ed Miliband’s office made similar points to those made by Duncan. Stewart argued that realism is good, but when it drifts into pessimism, it becomes more difficult. If it drifts further, into fatalism, it challenges the notion that politics can make any difference to people’s lives. Challenging fatalism will be a key election issue in 2015, he said.
Later in the morning, Danny Finkelstein (who was excellent, by the way) didn’t quite go into fatalism, but he came close when talking about industrial policy.
There was plenty of food for thought on offer at the Resolution Foundation this morning, as Peter Kellner, Penny Young, Stewart Wood and Danny Finkelstein debated whether the 2015 poll would be the ‘Living Standards Election’.
Kellner’s latest research for YouGov showed, perhaps unsurprisingly, that Conservative voters tend to think that fiscal responsibility is the nation’s biggest economic priority, whereas Labour voters opt for growth. Kellner concluded that this gives the Tories a potential advantage, as some growth in the next two years, even if lower than is desirable, may feed into a belief that the Coalition has delivered both objectives.
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.
The last few weeks have seen much discussion of the policy successes and failures of the 1980s. A particularly unpopular one with the public was the privatisation of major utilities. By 61% to 26% the public think these would be better run by the state. Our most recent report finds that there are certainly questions to be asked about one of these utilities – the water industry.
We’ll take just four of these issues now, starting with the ownership structure of water companies. The privatisation of the water industry in England and Wales in 1989 can be seen as part of a broader ‘popular capitalism.’ One of the architects, John Redwood, described this as “shares for everyone, property ownership for the many.” Our research suggests it would be a stretch to say this of the water industry today. Whilst it was the norm in 1989 for the ultimate owners of water companies to be publicly listed on the stock exchange, today the majority are owned by private equity consortia, frequently with opaque ownership structures.
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.
The public sector finance statistics are out and the headline figure is a very small (£300mn) fall in the deficit in the financial year 2012/13 over 2011/12. That said, Left Foot Forward is reporting that Sky’s Ed Conway has noticed that if you exclude various special factors the deficit may actually be up by a small amount.
To an extent these minor details don’t really matter – the broad picture is that the deficit is roughly the same as it was last year and is expected to stay at that level this year.
We reduced the deficit by a third in our first two years in government, mostly by massive cuts to public investment, which we now understand were a big mistake and have damaged the economy. We’ve also now realised that trying to reduce the deficit further while the economy isn’t growing is self-defeating, so we’re not even going to try to get back on track until it does grow. We won’t miss our fiscal targets, since we no longer really have any. If the IMF understood that we’re not really going anywhere, perhaps they would stop telling us to change course.