The UK’s two stage ‘recovery’ & fiscal policy
The chart below shows the level of quarterly GDP over the past five years and tells us a great deal indeed.
It shows the depth of the recession in 2008/09 with GDP falling back some 6.3% between Q1 2008 and Q2 2009 and the poor state of the recovery to date with GDP still 2.6% below its pre-recession level.
But more than that the chart also demonstrates that the ‘recovery’ to date has come in two stages. In the five quarters till Q3 2010 the economy grew by 2.7% – a respectable if not spectacular performance. However in the ten quarters since that time, growth has been just 1.2%.
2.7% in five quarters versus just 1.2% in ten.
If the recovery had maintained it’s “stage 1” pace in the last 30 months, GDP would now almost 5% higher than it currently is and over 2% above it’s pre-recession level.
There are off course several reasons why the pace of the recovery slowed sharply – the impact of the Eurocrisis on exports & the global commodity prices on inflation and incomes being two. But whilst recognising the impact of ‘global factors’ in slowing growth it would be foolish not to consider the impact of fiscal policy. (Indeed I would go further and argue that faced with unexpected global shocks there was a strong role for fiscal policy to react by doing more to support growth).
The following chart from the Bank of England shows, very clearly, the extent of the fiscal tightening over the last few years.
It may of course be the case that fiscal tightening in 2011/12 and 2012/13 accompanying poor growth whilst fiscal loosening accompanied stronger growth in 2009/10 is entirely coincidental. But it is more likely to be the case that a change in fiscal policy explains at least some fo the weakness since late 2010, this certainly the view of most observers with the IMF being the latest this week to say that fiscal tightening has been a drag on growth. This is also the clear view of the OBR.
We’ve been hearing a lot recently about how the ‘economy is healing’ but is was healing a lot faster in 2009/10 when fiscal policy was supporting rather than subtracting from growth.