Optimists will no doubt point to the revising away of the “double dip” as good news but the longer term picture is still of an economy that has struggled to grow since 2010.
The bigger, and more important revisions, were to early 2009 – as this chart from the ONS makes clear:
The fall in GDP in Q1 2009 for example has been revised up from-1.5% to -2.5%. Overall GDP is now seen to be 3.9% below its pre-recession peak rather than 2.6%.
As Chris has written, this makes the often discussed ‘productivity puzzle’ of output falling faster than employment even more puzzling:
With the level of output lower, and having declined faster, labour hoarding in the early part of the recession was even more extreme than we thought. The recovery in jobs since is also even harder to explain.
It does perhaps though help explain the pace at which the government deficit increased in 2008/09 – the plunge in output was much deeper than thought and so the fall in tax revenues that drove the widening deficit is now more understandable.
Overall though, today’s revisions do not fundamentally change the economic picture. The UK experienced a deep recession in 2008/09, recovered a bit in late 2009 and early 2010 and struggled to recover since. The hole we are in is deeper than we thought but our progress in getting out it remains slow.
Whilst changing recent economic history is interesting (and today’s numbers once again highlight a practical difficulty of nominal GDP targeting – it is subject to revisions, years later), what is more interesting is to ask is, what do today’s figures tell us about out near term economic prospects?
Here we got two crucial bits of information. First, real household disposable income plunged in Q1 this year.
Real wage falls, changes to taxes and benefits and inflation have all contributed to a tight squeeze on living standards and less money in people’s pockets.
But, as the ONS make clear today, household consumption continues to grow.
To reconcile these facts, we need to look at the second important bit of information in today’s release – the household savings ratio.
The saving ratio in Q1 2013 was 4.2% following 5.9% in Q4 2012. This decrease was due to a rise in household final consumption and a fall in compensation of employees in the latest quarter.
In plainer terms – household income fell but household spending rose and the difference was a decline in household savings.
The savings ratio is now back down to it’s lowest level in 4 years. The chart below gives some context.
So I foresee three possible scenarios for the UK economy in the next three or four years (in the absence of rapid rebalancing towards a net trade or investment led recovery and in the absence of a change in fiscal or monetary policy):
- First, and most preferable but most unlikely, we get strong growth in real incomes as inflation falls back towards 2% and wage growth increases. If that happens consumption growth will be stronger and the economy will grow at a decent pace.
- Second, and what I think is the most likely outcome – my central ‘forecast’ if you will – household income growth will be weak and the savings ratio will not drop by much. The result will be weak consumption growth and an economy that is growing, but growing slowly – in the order of 1-1.5% a year. In historical terms of recovery from recession this is pretty much a disaster.
- Third, it is possible that we still get weak income growth but that the savings ratio drops rapidly. In this scenario we’d see faster consumption growth and hence faster overall growth. This however would be accompanied by a big increase in household debt. It might give us 3 – 4 years of decent growth, but at the risk of increasing the financial imbalances that got us into trouble in the first place.
I hope for the first outcome, expect the second and worry about the third.
The new household saving data suggest we may be starting down the road towards that third scenario. Maybe that shouldn’t be such a surprise – the latest OBR forecasts do signal the apparent abandoning of ‘rebalancing’ in favour of consumer led growth after all.